Topic 7 – Overview

The Role of Knowledge Management & Intellectual Capital in

Strategic Business Units (SBUs)

Learning Objectives
On completion of the tasks set within this session you will be able to:

 Explore knowledge and Intellectual Capital in Strategic Business Units (SBUs).

 Discuss the importance of SBUs. This is central to any corporate analysis.
 Describe what is meant by Knowledge.
 Identify the characteristics of Knowledge.
 Assess the importance of Knowledge Management.
 Identify the Intellectual Capital in an organisation.
 Describe the structure that constitutes the balance of intellectual capital.
 Measure the intellectual capital of an organisation.
 Apply an appropriate framework when measuring intellectual capital.
 Define social capital and identify its benefit to organisations.

A. Knowledge management - Theme Overview

The concept of knowledge in strategic thinking is not a new one and underpins a number of perspectives
from the traditional ideas of planning to the resource-based view of strategy. However, the learning basis
of Strategy as Practice theory and approaches to Intellectual Capital brings awareness of knowledge more
to the front of strategic thought. Therefore, it is pertinent to pause and consider a definition of the term
before exploring it in more depth:

“Knowledge is awareness, consciousness or familiarity gained by experience or learning”

(Johnson, Scholes & Whittington 2011)

The important characteristic of the Johnson et al view is the deliberate way that knowledge is generated
through activity. Thus, gaining knowledge is not a passive exercise and in order to understand it the
activities involved need to be explored.

What is Knowledge?

Organisational knowledge relates to ‘Strategic Capability’ but raises the question of whether it can be
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managed. Indeed, the concept is referred to as Knowledge Management in much of the literature and
organisational practice. The answer may depend on the assumption that “knowledge" like any other asset
can be stored, measured, and moved around in an organisation. It is a question that it will pay to have in
mind as we work through this half of the module.

There is a distinction between Explicit knowledge and Tacit knowledge.

To help make sense of knowledge, two sets of relationships are worth examining as they provide the
foundations for the strategic value that can be derived. Firstly, is the idea of a Knowledge Pyramid
that illustrates that way that knowledge is built from the data and information generated in business
life. Secondly, is the balance of three elements that come together in any organisational context i.e.
People; Process; Technology.

The Role of Knowledge

Part of the difficulty in making sense of the knowledge in an organisation is the myriad ways in which it
is evident in all of the activities that a business is engaged with but it can be encapsulated in the
following quote:

“ We know that the source of wealth is something human: knowledge. If we apply knowledge to tasks we
already know how to do, we call it productivity. If we apply knowledge to tasks that are new and
different, we call it innovation. Only knowledge allows us to achieve these two goals.” (Peter Drucker
cited in DeTienne & Jackson, 2001)

Examples of organisational knowledge are:

Market insights: What do customers value?

Competitive intelligence: What about new entrants or substitute products?
Technological expertise: Can lead to innovative products or processes
Understanding of Environmental (PESTLE)factors: Strategic knowledge

Knowledge Creation and Sharing

Knowledge is key to sustainable competitive advantage. Knowledge which is tacit and embedded in the
routines and culture of an organisation is difficult to imitate. Sustainable competitive advantage is
therefore more achievable where organisations are adept at knowledge creation.

Understanding what knowledge is and how valuable it can be to strategic thinking is a fruitful starting
point but one that does not necessarily offer practical benefits. It is important, therefore, to consider the
ways that knowledge is generated and more significantly shared. To this end, several categorisations lend
themselves to exploring these ideas.

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Firstly three activities are at the heart of organisational use of knowledge, namely:

Acquisition
Sharing
Utilisation
(Nevis, 1995)

Secondly Nevis‟ themes can be reflected through the need to:

Create Repositories
Improve Access
Enhance Environment(Davenport, 1998)

Often, though not exclusively these factors are managed through the use of information
technology. However, as we have already considered in the need for a knowledge balance there exists a
danger that technology is seen as a panacea rather than a tool. Indeed, a more fundamental understanding
of knowledge is offered through the ideas of knowledge conversion, principally in the work of Nonaka
who explored the ideas of tacit and explicit knowledge and the way they can interact to develop
knowledge. The resulting SECI model is an effective means of organisations starting to consider the
methods of knowledge sharing that can be utilised.

Knowledge Problems

Inevitably the concept of knowledge is not one that is not without its challenges. We have already
implicitly acknowledged some in the previous material but it is worth more formally exploring the
issues in greater depth as they present themselves in all organisations. Therefore, awareness of them
now can help to identify them in our work experience and locate ways around them.

The challenges of knowledge include:

Ownership
Trust
Barriers to understanding
Tacit-Explicit: is this desirable?
Culture: can it be managed?
Context specific

Knowledge Management Culture and Environment

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From the preceding discussion two perspectives emerge that can help us locate the way that knowledge is
understood in organisations i.e. a Knowledge Management against a Knowledge Environment. These two
ideas are presented here as polar opposites and thus offer the extreme ends of a continuum. In reality
organisations can present elements of both but it is instructive to consider to what extent the culture of
the particular example leans towards either option.

B . Intellectual Capital – Theme Overview

Theme Overview

This theme introduces the concept of Intellectual Capital (IC). It considers the issues in measuring and
understanding intellectual capital and explores example frameworks aiming to make sense of
intellectual capital.

What is Intellectual Capital?

“One of the ways of considering the idea of Intellectual capital is as “A firm’s holistic prowess and
potential for creating value” (Rastogi, P. N. 2002) The academic perspective offered by Rastogi can be
developed in a more business direction along the lines of “Intellectual Capital is something you cannot
touch, but it still makes you rich.” (Thomas A. Stewart FORTUNE).

The background to the concept can be found in at least three disciplines:

Sociological – in the way that people, and the manner in which they communicate, are at the
heart of the thinking on the term;
Economic – the term „capital‟ is a clear indication of how businesses look to derive value
from the human resource that is increasingly at the heart of organisations;and
Accounting – As knowledge-based aspects are at the core of Intellectual Capital it is not
surprising that companies look to understand how they can better reflect the value of business to
include the intellect of its staff and activities.

Drawing on from the Economic and Accounting basis of the concept a simple, but powerful, question
raises itself - Is it a way of making tangible the intangible? As the Thomas Stewart quote illustrates if
the modern business is increasingly based on the knowledge and skills it contains who can they be
captured and made sense of?

Identifying Intellectual Capital

A potential difficulty raised by the concept of Intellectual Capital is how to structure and identify what
constitutes the balance of Intellectual Capital within an organisation. Therefore, several categories of
Intellectual Capital can be distinguished in the literature. Just to confuse a little further, different headings
are often used depending on the author. However, there are commonalities on what makes up the balance

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of IC, it is simply the labels vary. Below are examples of the categories that are often referred to:

1. Social Capital – Relationships within & outside the organisation.

2. Human Capital – The people within the organisation.
3. Structural Capital – The processes and operations of the organisation.
4. Customer Capital – Value of external relationships.

Importantly, whatever the category, a critical consideration is that knowledge underpins all of them and it
is the ability to consider these skills and activities that is at the core of the value of exploring and
improving Intellectual Capital.

How Do We Measure?
Wanting to measure something is a starting point but it does not necessarily identify the way that the
measurement should be carried out or the headings that will help to fill the IC containers that have already
been introduced. Other forms of capital do not present such an awkward problem as finance can be clearly
measured and the physical assets of an organisation can be counted and evaluated. In contrast, the
intelligence of a company is not such a straightforward and agreed concept as it is dependent on
subjective assessments. So, what sort of headings lend themselves to help us understand the IC within an
organisation? For example, if we are looking to develop the Human Capital of a company the following
are starting points:

Ø Qualifications

Ø Training

Ø Skills

Ø Experience

Inevitably there is a close link here with ideas of performance management and performance indicators
e.g. Critical Performance Indicators (CPIs). The following site (API Enterprise) is an excellent
resource that provides a lot of thought and material on these issues and is a helpful source for the next
task

Social Capital

Social Capital is defined by Adler & Kwon (2002) as 'goodwill available to individuals and groups'.
However, Pierre Bourdieu (1986) describes it as 'the aggregate of the actual or potential resources
which are linked to possession of a durable network of more or less institutionalised relationships of

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mutual acquaintance or recognition.'

Objective

The readings provided offer interesting ideas on Social Capital that will develop your awareness of the
concept and its value to your own experience within your organisation.

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