Short Essay on Intellectual Capital

Dr. Gene Benter

Introduction

An organization has been established because of human knowledge. All types of

organization. Whether they are manufacturing or servicing firms, they still are based on
organizing, developing, and taking advantage of a mandatory arrangement of
fundamental knowledge. It is widely accepted that the core of managing an organization
rests on knowledge. Every decision making process, planning, strategy implementation of
an organization is reliant on a never-ending gathering, analyzing, and use of relevant data
and knowledge. Knowledge sparks feedback that pushes the organization to act on an
impending action. Thus, we can say that meaningfully collected information sends off
commendable knowledge. This is to affirm that on-going learning, nourishment, and
influential administration of knowledge would innovate and improve people and
organization. With knowledge, organizations can enhance and develop their capability to
face the challenges of constant change. On this paper, I will discuss the extent to which
system thinking helps and develops the organization intellectual capital. My discussion is
focused on the conceptual notion about intellectual capital based on human and structural
knowledge that have been fueled with system thinking operating on both the
technological and intellectual plane. Towards the end of the essay, I tied up the entire
discussion with the extent system thinking help to develop organization intellectual
capital.

The Essay

Intellectual capital covers both the human capital and the structural capital putting
them together for more rapid growth. The company value depends on and includes the
entire worth of individuals together with company structure. In fact, as Davenport, et al
(1996) stated, “intellectual capital increases company values and makes business
operation more efficient”. In addition, Bucklew (1991) believed that the sharing of
competencies requires management of information. Information Management and

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Intellectual Capital (IC) are related. Intellectual Capital involves human resources,
information technology, business strategy and the participation of employees in order to
transfer rapidly necessary experiences in the company. It is energizing and charging both
the national and international operation. To get people to share competencies in the
organization, management must facilitate exchange of knowledge among employees.
(Bucklew, 1991) The organization ought to inform the members of available information,
make communication and intelligence accessible, and to train everyone to use the
information and whichever supporting technology the firm may have. (Hunter, 2002)

Intellectual Capital gives sharing of knowledge legitimacy, establishes the worth

of competence in a company and places value on combined individual capabilities and
experiences of co-workers. (Bucklew, 1991) Describing what Intellectual Capital is, Auer
(2003) considered it as the difference between the market and the booking value of an
organization. No one denies that Intellectual Capital is very vital for a knowledge-based
firm. However, the company’s annual auditing report does not contain Intellectual Capital
as an asset of the firm. Therefore, for Intellectual Capital to be noted as an asset of the
firm, it must be transformed into knowledge resources so that the firm can come up with
an Intellectual Capital statement. (Dearden, 1997)

Furthermore, Auer (2004) presented his four classifications of knowledge

resources to be included in the auditing report such as technologies, processes,
stakeholders, and employees. Added to these classifications is the inter-active component
of human capital that brings out the structural capital. Combining both the Human Capital
and Structural Capital generates the Relational Capital that pertains to the firm’s
customers.

However, according to Gary Becker (1993) Human Capital refers to the stock of
product skills and technical knowledge embodied in labor. Many early economic theories
refer to it simply as labor, one of the three factors of production and consider it a fungible
resource, homogeneous, and easily interchangeable. Other conceptions of labor dispense
with these assumptions.

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 In his book Intellectual Capital, Stewart (1997) introduces Intellectual Capital,
offers taxonomy for organizing it and makes the case for managing it. Others have
followed such line. Several people in the academic world followed more or less Stewart's
proposal, although with some variations: intellectual capital includes human capital as the
talent base of the employees, "structural capital" according to Bontis (2002), "the non-
human storehouses of information", while Gartner (2003) enlarges this to include other
organizational knowledge and "relational capital" which is the knowledge embedded in
business networks.

Samuel Bowles cited that Human Capital like in the United States for example,
became considerably more valuable as the need for skilled labor came with newfound
technological advancement. New techniques and processes required further education
than the norm of primary schooling, which thus led to the creation of more formalized
schooling across the nation. This early insight into the need for education allowed for a
significant jump in US productivity and economic prosperity, when compared to other
world leaders at that time. (Bowles, S. & Herbert Gintis, 1975)

Leif Edvinsson (1997) in an interview said that today’s industrial value chain
processes no longer dominate value creation but innovation. Companies and shareholders
are seeking new ways of meeting market demands that can give the highest return of
investment more than piously developing the company’s production line. This call for a
need to invest into systematic innovation, knowledge upgrading, and new structures that
can assist organization innovate and make a difference. Moreover, all of these boil down
to investing in Intellectual Capital.

The importance of people according to Stewart (1997) has become significantly

urgent in today’s market. Money can talk but it cannot think. It is true that machines can
perform twice faster than any human beings can but machines are not capable of
inventing. Thinking and invention are the assets upon which knowledge works and
knowledge-based companies depend. For Quinn, (1997) “Ideas and intellect not physical
assets built great companies.”

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 Kaplan and Norton (1996) backed up the idea that knowledge boom sparks the
notion that people are important assets for the company. It is very surprising nowadays
that the company efforts are concentrated on hiring and retaining people with best
intellectual capabilities to perform their tasks as well as charismatic individuals that can
contribute productive ideas on how to improve the company business.

The norms and modes of knowledge that comprise Human Capital are skills,
incremental innovation, expertise, capabilities, competencies, non linear innovation, cross
fertilization of ideas, information technology based assets, combination of capabilities,
creativity, and knowledge integration. (Restogi, 2002) However, the most common
impression is that getting people to possess all these characteristics largely depend in
motivating them. Auer (2003) believed that when people are equipped with the necessary
attitude and unwavering commitment, what follows automatically is the learning process.
That is why, many companies lay down new compensation programs, performance
evaluation, and new corporate culture that are meant to drive in motivated and well-
committed employees. Edvinsson (1997) added a change in leadership style, which is
conceptual and interpersonal than technical, oriented. In addition, for Miller – Stewen,
(1996) every member of the organization must be given freedom to incorporate new ideas
into the entire Intellectual Capital.

If the objective of Human Capital (HC) is to maximize employees’ knowledge

deposits Koenig, U and A. Memhill (2004), agreed that communication within the
organization should be maximized. The most important factor to have a successful
business is to install with in the organization an excellent communication system in order
to deliver to the members all the necessary information that they may need to fulfill their
tasks productively. Kaplan and Norton, (1996) saw another angle and indicated that poor
individual performance and idea generation may not always be the members
shortcomings. The organization’s structure may have been influencing employee
unsatisfactory behavior and results.

On the other hand, Wilensky (1967) cautioned that an organization should not try
to implement knowledge management by just any means but it has to be done

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systematically and very carefully. There are differences between the organizational
knowledge and the individual way. The organization itself is liable to create and manage
knowledge that is only valuable for itself and the individuals in the organization. This
was validated by Hunter (2002) reiterating the point that innovation restructuring and
many other concepts the members assimilate may have different impact to the
organization’s Structural Capital. This can be the result of cultural differences and social
interaction. The result could be a product knowledge gap, which have to be fulfilled by
either buying or developing knowledge.

Rastogi (2002) had another idea in relation to the linkages between Human
Capital and Structural Capital. He believed that the productivity of Intellectual Capital
depends on the strength and vitality of all of its components and the linkages among
them. The Social Capital of the firm demotes the orientation of its people to collaborate
simultaneously and with commitment in support of its business goals. Its strength stems
from the trusting relationship based on an ethics of help and care, and a powerful sense of
shared destiny. Those are grounded in the firm’s values and vision. Social Capital
reciprocally affects both Human Capital and Knowledge thus supports the organization
Intellectual Capital. (Rastogi, 2002) Human Capital represents people who constantly
enrich and enhance their knowledge and skills, both individually and collectively. It is
shaped by, and being shaped continually, both by the social capital and structural capital
in order to achieve what the organization intends. (Stewart, 2001)

The need to develop the Human and Structural Capital is essential in order to
intensify the organization’s Intellectual Capital. The organization’s IC and HC can be
enhanced in Systems Thinking, which nowadays are very popular among knowledge-
based firms. (Wilensky, 1967) However, Forrester (1994) and Sanal (2004) still have to
find out what systems thinking because they claimed that systems thinking have no clear
definition or usage. The system thinking terminology is applied to the field of soft
operation research as system thinking.

However, Checkland (1998) had already been espousing the concept of system
thinking since then and its practice is applied to develop Intellectual Capital. System

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thinking is also considered as a unique approach to problem solving because it views
some problems as a part of the over all system and by focusing on the problem alone will
only develop to another undesired element or problem. It is a framework that is based on
the belief that the component parts of a system will act differently when the systems
relationship are removed and it is viewed in isolation. The only way to understand fully
why a problem or a difficult element occurs and persists is to know the part in relation to
the entire body. (Checkland, 1998) Consistent with systems philosophy, systems thinking
concern an understanding of a system by examining the linkages and inter actions
between the elements that comprise the entirety of the system. (Forrester, 1994)

Forrester elaborated that system thinking is coming to mean little more than
thinking about systems, talking about systems and acknowledging that systems are truly
important. In short, he claimed that system thinking implies a rather general idea and a
rather superficial awareness of the system. System thinking can provide carefully a
general public introduction to the existence and importance of systems. It can serve a
constructive role as a door opening to system dynamics and to serious work towards
understanding systems. If system thinking leads to a deeper understanding using system
dynamics, then the result is positive. (Forrester, 1994)

Sanal (2004) came up with systems thinking concept as a framework for seeing
interrelationships rather than seeing things separately. In practice, system thinking is a
group of activities ranging from conceptual to the technical. At the theoretical end of the
group is the adoption of the system perspective or viewpoints. System thinking employs
the concept of a system as an organized completely in which parts are related that
generates developing properties and has some purpose. Checkland (1990) made
presentations that there were two complimentary traditions within systems thinking. One
was the hard system that refers to the technology and the other was soft thinking that
pertains to human capabilities.

Becker (993) clarified information by control and information theory hard

systems included the systems of engineering, system analysis, and operation research.
Hard systems involve simulations often with the use of computers and the techniques of

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operations research. Checkland (1998) stated that hard system could be an aid for
organization’s problems that can be quantified and justified. However, it cannot take
easily unquantifiable variables like opinions, cultures, politics, democracy and many
other abstract realities. There is also a tendency that hard system may treat people as
being passive rather than having complex motivations and varying behaviors and
attitudes towards work.

Checkland introduced the soft system methodology as differentiated from the hard
system thinking which was apparently not with equal footing to Forrester (1994) soft
operating research. The Soft System Methodology is used to analyze and to create models
both for technology systems and for human systems. The Soft System Methodology is
very helpful in understanding the nature of irrational behavior and granting possible
solution to complex and unclear problems. Soft systems thinking are for systems that
cannot be easily quantified especially those involving people holding multiple and
conflicting frames of references. Soft system thinking is useful for understanding
innovations, viewpoints, and interactions and addressing qualitative as well as
quantitative dimensions of problem situations. In addition, this field utilizes foundation
methodological work developed by Peter Checkland, with Brian Wilson and their
colleagues at Lancaster University. (Checkland, 1999)

Checkland exemplifies that the core of Soft System Methodology is the

construction of models of the system being studied. These models can be used to discuss
on how to bring about organization change. Participants are encouraged to engage in
debates and discussion that could generate several points of view. The learning that is
derived from the interfaces becomes a source of powerful action. (Checkland, 1998)

Checkland classified human soft system as “collection of activities that people are
purposefully engaged and the relationship between these activities”. The Soft System
Methodology (SSM) is applied to find solution when there are difficulties and unclear
organization objectives, or the organization problem at hand came up with varying
degrees. The Soft System Method accepts these differences and explicitly tries to take

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these situations from the outset so that there would be an acceptable analysis for all the
parties involved. (Checkland, 1990)

The use of Soft System Method approach does not attempt to define single right
method of action but through an interactive process. It shows an acceptable improved
path of action What makes SSM valuable in the development of the people who are
involved in the methodology not only the principal players within the designated systems
but also the stakeholders and owners of the system. (Presly, A and Laura M, 2003) In
other words soft system thinking crystallizes knowledge that builds Intellectual Capital
for an organization as it recognizes the complex environment in which the human system
operates. (Checkland, 1990)

The introduction of the term knowledge is explained by the word itself and no
further discussion is needed to understand knowledge. However, in relation to Intellectual
Capital knowledge has to have some value before it is considered an asset to the
organization. When is knowledge an asset then? (Seymour, 2003) Based on the treatise of
Bowles and Gintis, knowledge has its own unique and justifiable characteristics unlike
labor and the other factors of production. It is expandable and self-generating as it is
constantly used like the knowledge of a physician when he gets more experiences in his
field. It simply that knowledge base increases and its endowment in Human Capital. The
higher the acquisition of knowledge the higher is its capital value. Transportable and
shareable knowledge can be moved and shared but the transfer does not prevent its use by
the original holder such as authors, poets, musician, and other specialized fields of
learning. However, the transfer of knowledge may reduce its scarcity-value to its original
possessor. (Bowles & Herbert Gintis, 1975)

Robert Wilson agreed to Bowles and Guntis that knowledge then is increased and
heightened with the person’s capability to incorporate in his job performance all the
inputs he has acquired from study, reading, and long exposures to the organization.
Furthermore, a person’s competence in handling the technologies of the current means of
production and distribution qualifies his intellectual capital to comply with the needs of
the firm. (Wilson, 2001)

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 Knowledge creates value through its instilling into the company products.
Knowledge importantly implies a firm’s ability to produce and deliver customer-valued
outcomes. The forms and modes of knowledge that create value comprise a firm’s skills,
incremental innovation, streamlining processes, non linear innovation, cross-fertilization
of ideas, information technology based on knowledge assets, combination of capabilities,
creativity and knowledge integration. It can be said that the organization knowledge is the
nature of its knowledge resources that together account for its value creation capacity.
(Rastogi, 2002)

Conclusion

System Thinking becomes necessary in the world today especially for a person to
develop his knowledge further and increase his productivity through application of every
available hard system methodologies. The presence of every soft system methodologies
in the organization serves as the organization’s competence in establishing a
commendable Intellectual Capital that could catapult the firm to a higher standard of
performance. The link between Systems thinking and Knowledge can be summed in the
person’s willingness to increase his input so that he could contribute to the building of a
stable organization capital. In order to establish the link between system thinking and
Intellectual Capital the process evolves around the elements of human capital, social
capital, structural capital, and customer capital. Every element on this classification
should be taken with considerable attention so that communication within the
organization becomes a powerful means in building the organization Intellectual Capital.

The extent to which system thinking helps the organization Intellectual Capital
evolves around the entire components of Intellectual Capital. System Thinking is
instrumental in adding more value to Human Capital as it bridges the gap of production
with Information System and Knowledge Management. System thinking guides
Structural Capital and Social Capital to make the people in the organization performs

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their utmost capabilities. Lastly, system thinking both technology and human ought to be
present within the organization Intellectual Capital.

References

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