Intellectual Capital-based Value Creation Model: Evidence from Small and Medium-sized Enterprises
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1 Intellectual Capital-based Value Creation Model: Evidence from Small and Medium-sized Enterprises Lidia Galabova * Glasgow School for Business and Society Glasgow Caledonian University 70 Cowcaddens Road, Glasgow G4 0BA, UK lidia.galabova@gcu.ac.uk * Corresponding author Guy Ahonen Finnish Institute of Occupational Health (FIOH) Topeliuksenkatu 41 B Helsinki, Finland guy.ahonen@ professori.fi 1
2 Structured Abstract Purpose The purpose of this paper is to explore the relevance of an Intellectual Capitalbased Value Creation model (ICVC model) to the daily practice of small and mediumsized enterprises (SMEs). The paper reports on research undertaken with SMEs from the service sector in three EU countries: Bulgaria, Finland and Scotland. Each of these countries is representative of a different stage in the development of a knowledge-based economy (KBE). Only knowledge that contributes to the value creation process and sustainable competitive advantage of the firm is strategy relevant. We argue that the conceptual framework developed from our research is more appropriate strategy management tool to be applied in practice in the knowledge-based economy. Design/methodology/approach We consider data drawn from two sources. First, a literature review of theory and previous studies gives an overview of the current understanding of, and attitude towards, the value creation process. Key limitations of an IC-based strategy perspective identified from our conceptual analysis are discussed. Second, an exploratory study based on qualitative data analysis of three case studies and twenty one semi-structured interviews with senior managers of SMEs gives evidence about the relevance and sustainability of the IC-based model we present. The interview approach was adopted in order to gain data that would provide a realistic picture of dayto-day practice and enable comparison with the developed theoretical model. Originality/value Drawing upon findings from our literature review of strategy (Barney 1986, 1991; Penrose, 1959; Porter, 1985; Wernerfelt, 1984; Zack, 1999) and knowledge management (Spender, 1989; Nonaka, and Takeuchi, 1995; Edvinsson, 1997; Sveiby, 1997; Stewart, 1997; Roos et al., 2005), and considering evidence from our qualitative data analysis, we prove the relevance and sustainability of an ICVC Model. Further, we argue that sustainable competitive advantage depends on the attitudes of SMEs towards value. In a KBE, both tangible and intangible outcomes should be considered as value generation factors. Practical implications The application of this ICVC model will contribute to improving the SME s policies and practices on strategy management. Following this IC- 2
3 based conceptual framework, SMEs will be better adapted to and more competitive in a KBE. Keywords Value creation, Knowledge-based economy, Intellectual capital, Well-being, Small and medium-sized enterprises. Paper type Academic Research Paper 1 Introduction The transition towards a knowledge-based economy (KBE) has led to fundamental and revolutionary change in the nature of business and economic activity. Intangible assets, such as knowledge, human capital, core competencies, intellectual property, business processes, brand names, and business relationships are becoming key resources in the new economy, overtaking the importance of physical and financial capitals of the old economy. Intangible assets do not render physical assets redundant; instead they build on them. In the European Union (EU) context the knowledge-based economy is related to trends to greater dependence on knowledge, information and high skills levels, and the increasing need for ready access to all of these by the business and public sectors. EU strategy towards becoming a leading knowledge-based economy recognises knowledge, research and innovation as key drivers of productivity and economic growth. By 2011, small and medium-sized enterprises (SMEs) formed 99.8% of all enterprises in the EU, and are therefore critical in both economic and social terms. SMEs in Scotland account for 99.3% of all enterprises, providing 53.6% of employment and contributing 36.5% of national turnover (Scottish Government, 2011). In Finland, SMEs account for 99.7% of all enterprises, providing 60.6% of employment and 54.9% of value added. They account for 99.7% of all Bulgarian enterprises, providing 66.9% of employment and 59.2% of value added (Eurostat, 2011). The strategy management models considered in current theoretical and empirical management literature group around two main perspectives market based models of strategy (Porter, 1980, 1986) and resources-based models of strategy (Rumelt, 1984; Wernerfelt, 1984; Barney, 1986; Nelson and Winter, 1982). The first group of models consider different factors of the external environment and how the enterprise answers to the challenges resulting from their impact. They are industry specific, considering the market position and performance of enterprise in relation to main competitors, suppliers 3
4 and buyers. The second group of models are based on the presumption that the enterprise should build its own strategy based on the access to specific resources and its ability to identify, protect and exploit its unique skills and assets. Though, theoretically the second group of models could potentially consider intangible assets as enterprise-specific resources, still there is not a model that explicitly acknowledges and evaluates their impact. Further, in most of the strategy management models up to now the output from the value creation process of the enterprise is recognised through the financial results, i.e. the revenue. Little attention is paid to the intangible benefits that have the potential either to be transferred into revenue and/or re-invested as intangible input. The purpose of this paper is to explore the relevance of an Intellectual Capital-based Value Creation Model (ICVC Model) to the daily practice of small and medium-sized enterprises. The paper reports on research undertaken with SMEs from the service sector in three EU countries: Bulgaria, Finland and Scotland. Each of these countries is representative of a different stage in the development of a knowledge-based economy 1. According to ICVC model only knowledge that contributes to the value creation process and sustainable competitive advantage of the enterprises is strategy relevant. Knowledge translated into economic value is Intellectual Capital. Assets that are generated as a result of the knowledge management are regarded as intangible assets (Sveiby, 1997). They are source of future benefits which do not have a physical embodiment. 2 Conceptual Framework It has been widely acknowledged that different resources of a firm have different strategic value depending on the environment. Due to the development of knowledgebased economy the intangibles have imposed as strategically more important compared to physical and financial capital. There is a general agreement among strategy and IC theory scholars (Ahonen, 2000; Bontis, 1998; Bontis et al., 1999; Grant, 1996; Edvinsson, 1997; Nonaka and Takeuchi, 1995; Spender, 1989; Stewart, 1997; Sveiby 1997, 2001; Roos et al., 2001, 2005, Mouritsen, 1998, 2004; Zack, 1999) that the new economic setting needs a knowledge-based strategy management perspective, acknowledging the impact of the 1 These countries are considered to be at different stages in the development of a knowledge-based economy and innovation based on the taxonomy used in the report of Tilford and Whyte (2010) by which EU countries are classified as: Strong performers (Denmark; Sweden; Finland; Austria and Netherlands); Must do better (France; Germany; and the UK (including Scotland)); Laggards (Spain; Portugal; Greece; Italy; Poland; Hungary; Romania; Bulgaria; Malta) in relation to their development as a KBE. 4
5 intangibles on the value creation process. The ability to create knowledge and the capabilities related to its effective and efficient exploitation provide theoretically unlimited potential to firms in the drive towards a sustainable competitive advantage. So far most of the value creation models, such as the M. Proter s (1985) Value Chain recognise the impact of intangibles to a limited extend. In fact none of the existing models acknowledges the fact that the outcomes of the value creation process are both tangible and intangible. The traditional approach recognises only value that is economically (commercially) relevant. From an IC point of view it is crucial that also intangible results are produced. These are generated both by tangible and intangible resources in a continuous process of interaction and transformation between human capital (HC), structural capital (SC) and relational capital (RC). Further, financial outcome or revenue produced can be both tangible and intangible. The final output closes the loop providing new recourses, both tangible and intangible (Galabova and Ahonen, 2011). Tangible resources Physical and Financial Capital HC Tangible output Monetary revenue Intangible resources SC RC Intangible output Non monetary revenue Figure 1 IC-based value creation model At the heart of this model is the understanding that knowledge is both a means and an end to sustaining a business in a knowledge-based economy. It is the authors conviction that from a strategy perspective it is crucial to acknowledge explicitly the importance of both tangible and intangible resources and outputs, as well as reconsider the generally accepted understanding of economic value relating it simply to monetary revenues. Furthermore, it is not widely recognised that in practice value is created as a result of the constant interaction and transformation of Physical, Financial and Intangible capital. To some extent this is because there are still not adequate standardised measures for evaluating intangibles. However, this should not be a reason to underestimate their strategic importance for the management. The complex nature of value produced as a result of the firm performance needs further attention and research. Therefore we are going to present results from an exploratory study investigating how in practice the above presented ICVC Model supports the everyday practice of SMEs in the three countries under study. 5
6 3 Methodology This exploratory study was based on qualitative data analysis of 21 semi-structured interviews with senior managers of SMEs from the countries under study. The authors decided to focus their attention on senior managers: in the context of SMEs, they are the key decision makers and the strategic management of these enterprises is largely determined by their personal understanding and believes about what is important to their business. All the interviews were transcribed and translated into English by the lead author, and then analysed. For the purposes of the present paper interviewees are given consecutive numbers from 1 to 21 (Table 1). Table 1. Codes of Interviews by Country Country Number of interviewees Codes of interview given for the paper Scotland Finland Bulgaria Total 21 During the study the lead author kept a field diary. In addition to basic information about the interviewee and organisation, each interview transcript is accompanied by short notes which describe the impressions and reflections of the researcher shortly after the interview. Where this was made available, additional documentation, such as the organisation strategy and/or policies, and website information has informed the analysis. Further, based on the initial analysis of the interviews were selected SMEs for an in depth case study research from each of the three countries. The general objective of case studies is to develop as full understanding of that case as possible (Punch, 1998). Therefore this approach is very suitable in early stages of research when more in-depth information is needed. The case study is a research strategy which focuses on understanding the dynamics present within single settings. Case studies combine data collection methods such as firm documentation, web-site and official publications, interviews, questionnaires, observation and evidence of its performance. This mixed approach was adopted in order to gain data that would provide a realistic picture of day-to-day practice and enable comparison with the developed theoretical model. The data from the interviews was transcribed and coded into three broad categories corresponding to the intangible element of resource, value creation (i.e. capital) and output sections of our model. 6
7 Intangible resources Value creation/ Capitalisation of resources Intangible output 4 Testing the ICVC Model in SMEs Interviews 4.1 Intangible resources Data from the interviews illustrates that 2/3 of the service sector SMEs managers consider that the impact of the intangibles in the value creation process is over 70 per cent, as 7 out of the 21 interviewed consider the role of the intangibles to the business performance is over 90 per cent. In over 80 per cent of the studied SMEs intangible resources are recognised through knowledge, know-how, skills, potential/ capacity and willingness to learn of employees. The identification of intangible resources as a critical to the performance of the enterprises is illustrated in the quote below by a small business manager from the finance industry, who finds a straightforward relation between the business performance of the company and the people working within it. we are as good as the people within the business. Because, as long as one them walks out of the door so does the intellectual asset, go with it. You build a reputation based on doing good things in the market place, but you are still as good as the people that work within the business (Interviewee 2, Scotland). It is important to note those intangible assets are mostly recognised through the relationship with customers. 20 out of the 21 interviewees consider relationship with the customer central to the value creation process. In fact many of SMEs managers recognise the capabilities of their employees in relation to their ability to understand the needs of customers, their commitment and attitude towards work and skills to establish a good and sustainable relationship. The female manager of a small, but highly innovative IT enterprise of 20 people, based in Bulgaria shares:...all we have are human resources. Well, that is the specific for us. In fact, for us people are the most important... and continues Our strategy is close to the client. We speak to each one of our clients separately, you know, we adjust the program according to his requirements, we review it, we teach him, he teaches us; you know, overall, a kind of a development along with the client according to The interesting clients are those who want constantly something new, something new is happening all the time (Interviewee 19, Bulgaria). 7
8 The interrelation and transfer between the human capital and relational capital is recognised too by a Scottish female manager of a medium-sized care enterprise. She considers these two elements of IC as central to the value creation process. staffing is crucial, because it s the staff that gives us the good quality; that gives us the reputation to increase the income we want more parents to come, to do that we need to increase our reputation (Interviewee 3, Scotland). Sharing similar view the manager of a small Finnish IT enterprise of 10 people remarks: So if you change people and leave everything else as it is and then bring new people then you would have probably a different kind of company (Interviewee 11, Finland). An interesting observation is the fact that SMEs managers acknowledge SC as least important to the value creation process in their companies. To them human and relational capital have a much stronger and more direct impact on the value creation process. 4.2 Value creation/ Capitalisation of resources The data analysis shows that IC is widely recognised among SMEs managers from the three countries as a factor in the value creation process. What is important to note is the fact that further to IC they acknowledge the impact of the well-being in the value creation. This derives from the fact that most of them recognise IC mainly thought its elements as the share of HC is biggest. Therefore, naturally comes the conclusion that people feeling satisfied with the work done, supported and encouraged by their colleagues, and overall happy perform best. However, the understanding for well-being in the context of SMEs has a different nuances often referring to the importance of friendly, family like, supportive working atmosphere, as well as the nature of work itself, and their ability as managers to offer employees the freedom to decide on the best way to do a task or project. When talking about the important aspects of the operation of company relevant to the value creation process the manager of a small Scottish IT enterprise reflected on issues such as: support from the team and the manager and the overall company to, to help them improve their skills, whether that will be directly at the job that they do, whether it would be the other things they join in to make better. So, they feel supported, they feel they can do the job. It feels there is a path to learn, amm... and be educated and grow and to be more experienced (Interviewee 1, Scotland). 8
9 Further, the views of over half of the interviewees touched upon the understanding of well-being as closely related to work-life balance, the provided opportunities to develop and build on knowledge capital and feeling appreciated. well-being is how content a person is with his or her situation how is personal life and business life how the balance is in there does the part that you spend at work does it provide you aam. challenge, does it provide you intellectual challenge in so to speak. So, is it something that that really stimulates you, that brings you, that makes you happy in that sense that you are, you are able to provide something and you understand that you are providing so. (Interviewee 12, Finland). Same thoughts are shared by Bulgarian entrepreneurs too. work is part of our life, and it is a substantial part of our life. So, to say half of your continuous life is at work and therefore for us attitude such as: it is just a work is not acceptable, it is much more than just a work (Interviewee 21, Bulgaria). Over 70 per cent of the interviewees consider well-being is found upon the possibilities for learning and gaining knowledge and skills that promote personal development. 4.3 Intangible Output On the question what they do in order to increase value of the company an entrepreneur from the finance industry answered: we are as good as our last deal so to speak. the only thing we can do is to build a brand that is nationally recognised and in that way there is some good will attached to the name which in turn gives value (Interviewee 2, Scotland). Most SME managers intuitively acknowledge not only the tangible outcome most often evaluated through the tangible revenue, but appreciate the human capital and relational capital of the enterprise. Developing knowledge, skills and fostering the creativity closely linked to the aim of satisfying the dynamically changing customer needs and wants in practice increases the organisational knowledge and potential capabilities of the enterprise too. This is an outcome, which is very difficult to be described quantitatively and evaluated through tangible revenue. However, the reality is that though hard to be formalised and put in a more comprehensible framework this outcome exists and is created as a result of the operation of the enterprise therefore the description of this phenomena as intangible output is suitable. 9
10 if we were to sell the business that s the only way we can find out what the business is worth. Then the people that would be buying our business would also be buying us. But, if we wanted to sell the business and basically retire or go to beach or whatever, then that s not going be good for whoever buys our business, because the intellectual asset is gone (Interviewee 2, Scotland). Among the most widely recognised intangible outcomes, resulting from the enterprises performance, are these related to the image, brand, and relationships with customers. I mean the established relationship with customers, I mean the quality, today, tomorrow, the day after tomorrow but maybe 50 per cent of the whole process are the relationships with customers, because if you don t pay attention to them, don t communicate with them, if you don t do what they want for the customers come for several reasons, not only because we cook so good, but because of the attitude towards them, the experience of visiting us (Interviewee 16, Bulgaria) The quote above gives clear evidence that both tangible and intangible outcome are packed together. Therefore it is often difficult to recognise the intangible aspect for most people just perceive it as part of the tangible product or service and/or tend to take it for granted. Based on the analysis of the data from the interviews three IT enterprises from the three countries under study have been selected for more in-depth analysis. 5 Testing the ICVC Model: Evidence from SMEs 5.1 Case study one Scotland Case study one is a Glasgow based IT support and service company of 12 employees, established in 1994 with clients across Scotland and Northern England. The company has proved itself as a reliable and trustworthy partner providing services of highest standards to organisations from various industries who consider strategically more reasonable to outsource the IT support and services. Over the last 18 years the company managed to create stable and growing customers base through its proactive approach towards their customers. One of the core business values shared by the company managing director is the understanding what our business is, and what we are here to do, and why that is important for the clients (Interviewee 1, Scotland). The company mission is help their 10
11 customers focus on their core business by providing reliable support in administrating and managing complex IT systems and guaranteeing for the reliability of these systems. Central competitive advantage of this IT Company is its knowledge-based management philosophy and personal attitude towards their clients. Therefore the young male managing director, and owner of the company, believes that the company is as good as the staff within it. And while you can create systems and processes, which deliver consistent results to clients, the employees still make a huge difference in that (Interviewee 1, Scotland). He recognises soft skills of his employees as a key intangible resource. In his perspective it is much more important to hire people who have a willingness to learn, who are eager to get better themselves, who want to achieve things who will put a lot of effort... because we can train them in IT, as long as there is willingness to learn and an aptitude for things to be trained and experience (Interviewee 1, Scotland). The company acknowledges the IC as key capital crucial to value creation process and sees its relationship with clients as central to the business success. At the core of the company mission is the idea that employees should be able to understand what the business of the company is about, and what is important for their clients. As a result the company has a number of success stories with loyal customers that received optimal solutions for their specific case or timely and adequate support in emergency situations. Since the company works with a wide variety of companies from many different sectors the impact of the intangibles represented through specific knowledge, skills, attitude and willingness to learn in practice comprise over 80 per cent of the capital of the company. Each of its client companies has different needs at different time. Further, equally important to the competitive advantage and company performance is the outcome from the business. As a result of its activity the company has established excellent relationships with its clients. This not only leads to loyalty and sustainable market position, but in fact is investment and key factor contributing to the growth of the company, for most of its clients recommend it to their partners and third parties, and thus stimulate the increase of the market share. The IC created as a result of the work of both management and employees depends to a large extend on one additional factor well-being. In the case of this company wellbeing is seen as: support from the team and the manager and the overall company to, to help them improve their skills, whether that will be directly at the job that they do, whether it would be the other things they join in to make better. So, they feel supported, they feel they can do the job. It feels there is a path to learn, amm... and be educated and grow and to be more experienced (Interviewee 1, Scotland). 11
12 5.2 Case study two Finland Case study two is a Finnish ICT entrepreneurial, medium-sized company, founded in 1999 by three partners. The company has 80 employees situated in Helsinki and Vaasa (Finland) and Malmö (Sweden). The company is Microsoft Gold Certified Partner. The average annual turnover of the company is around 8 million euro. The main goal of the company is satisfy the customers software needs through creating less software (Interviewee 12, Finland). The company has managed to address successfully some of key problems of its customers related to the fact that often they find software far too complicated. The practical experience from actual situations over the years has led to a change in the mindset of the management. They had realised that quite often instead of making operations more efficient and thus creating opportunities for success on the market, software might as well raise the stress levels and the amount of unproductive overcomplicated work. Therefore the company has changed its focus towards taking into consideration these problems of its customers and offering them reliable software solutions leading to a reduction of the overall amount of the software used in practice by the end user. The management of the company considers the knowledge, skills and know-how of their employees as the most important intangible resource. The chief sales officer of the company considers as most valuable resource the information of employees both about clients problems and technical solutions. The big thing here is that... they [our people] understand the business of our customers, they understand the technical solutions, and specifically, that they understand how these two can be combined to bring value to customer (Interviewee 12, Finland). He evaluates the share of the intangibles in the value creation process as being over 60 % and continues: the intangible becomes tangible via the people that work and create software, create solutions to our customers (Interviewee 12, Finland). Further, he considers interaction and relationships with customers as central to the value creation process and the capitalisation of both physical and intellectual capital. a lot of that capital capitalizes only when you are doing things with the customers and you understand the real life problems and real life challenges that the companies have and how we can bring solutions and value to those processes (Interviewee 12, Finland). Another important aspect raised as part of the operation of the company is the impact of well-being on the overall performance of the employees. The company management 12
13 sees well-being as an important intangible, enabling the value creation process and describes it as: well-being is how content a person is with his or her situation how is personal life and business life how the balance is in there does the part that you spend at work does it provide you aam. challenge, does it provide you intellectual challenge in so to speak. So, is it something that really stimulates you, that brings you, that makes you happy in that sense that you are, you are able to provide something and you understand that you are providing so (Interviewee 12, Finland). It is worth acknowledging that management recognises well-being as the balance between work and life and the impact work has on personal life. Further, an important factor is the recognition of the ability to learn new things and develop and be content with the work done as central to the well-being. 5.3 Case study three Bulgaria Case study three is Bulgarian IT small company of 5 people established in 1995 specialised in the field of banking information technologies. The company develops software solutions comprising design, development, implementation and integration of information systems for the finance industry. The management of the company considers its employees the most valuable resource, as the final outcome of the company operation hugely depends on their creativity, knowledge and experience. As a result of their activity the company has a number of customers, which in practice contribute a great deal to the market image of the company. As the CEO defines them in practice they are the business card of the company. Another key intangible asset recognised as crucial to the success of the business is the trust trust among employees and thrust in building long term relationship with the company s partners. Trying hard to keep the deadlines and achieve the promised goals is its main value. Confidentially and information protection are among the main values of the company too. The CEO, and owner of the company, considers skills, experience, culture, attitude and trust of his employees as key elements of the intellectual capital. He evaluates IC share in the value creation process as being over 90%. He sees the relationships in his company more as a family-like and encourages the development of an organisational culture fostering personal attitude. For him work is part of our life, and it is a substantial part of our life. So, to say half of your continuous life is at work and therefore for us attitude such as: it is just a work is not acceptable, it is much more than just a work (Interviewee 21, Bulgaria). 13
14 Due to the character of the work done it often becomes part of the personal life. Therefore the company management considers important that it takes care to provide some additional incentives needed related to employees well-being, such as best medical insurance in the country, options for low interest financial support to its employees and possibility for a flexible working time. All these factors were acknowledged by the management as crucial to the well-being of the employees and thus contributing to the potential increase of the intellectual capital. Regarding the intangible outcome the company recognises its name and image among its customers, as well as the results from its social responsibility policy as an important strategic investment that will contribute to the sustainable competitive advantage and future growth of the company. At present the customers of the company are 30% of the financial institutions in the country both local and foreign. Finally part of the intangible outcome of the company is due to its excellent reputation as a trustworthy partner in the bank sector actively involved in social responsibility activities such as the development and distribution of an open software platform for schools. The benefits of this free of charge service is an example that not only financial outcome is important. In this case, the intangible outcome of the activity of the company brought immense potential for its further development. Benefits from the activity of this Bulgarian company are a result from its socially positive image and the huge network of potential partners established as a result of the effective and efficient management of its intangibles. 6 Discussion The analysis of the 21 semi-structured interviews and the three case studies through the lenses of the ICVC model demonstrated how in practice the model can enable the process of recognition of intangibles. Further it helps managers realise the multifaceted and complex nature of intangibles. It should be noted that this is still not enough to prove the effectiveness and efficiency of this model. What would be relevant now in order to reaffirm the results from the test will be to analyse value creation process without following the ICVC model, but applying the classical approach focused on tangible output. It is important to acknowledge that de facto even classical models such as the general system approach (analysing the input resources and the output), Porter s (1985) value chain model or even the Kaplan and Norton s (1992) Balanced Scorecard (BSC) consider to some extend the impact of intangibles. They are present as inputs in terms of information, human resources (though they are evaluated rather as something tangible, 14
15 than through their intangible properties). In some models, such as the BSC intangibles are partially recognised when considering factors such as business processes, organisational infrastructure, organisational culture, learning and growth, etc. However, what all this models fail to take into consideration is the intangible output of the value creation process. Due to the word limit and scope of this paper it will not be possible to make a detailed analysis of the business performance of the studied enterprises making a comparative analysis of the different models. We will limit our analysis to several cases which illustrate what type of information you get for strategy decisions when using the traditional models. Considering his strategy the manager of a small IT Bulgarian company of 13 people explains that the entry barer in their business is very low. All you need is: several laptops and a few contacts and you can start your business (Interviewee 15, Bulgaria). What is notable about this innovative and well performing company is the management decision to overcome the financial problems faced as a result of the world crises of 2009 not by making people redundant, but simply though getting rid of some of the physical assets of the company, such as the office premises. Since the key business process of this enterprise are related to programming and web design it has been decided that people can work from home or some Wi Fi cafeterias in Sofia. So far the changed business model proved to be quite successful. However, if we follow the traditional approach to evaluating the outcome of the business there will be little information about the entrepreneurial approach of the enterprise manager and the excellent base of customers he had established. In case someone decided to buy his enterprise and he [the present manager] quits his job, in practice there won t be much of the company to buy. There is not guarantee the employees will stay under the new management. Or even worse, they can stay, but they might not perform the same way. Besides, for some time the good image of the company will contribute to the value creation process, but unless the HC, SC and RC are preserved over the time, at its best the enterprise will become something different. The case of the Scottish finance enterprise is analogical. If we try to evaluate the input and output of the company we come across similar problem. The company consists of some computers and desks, a rented office, and several people, who at best could be evaluated through their education, qualifications, skills and working experience, i.e. some of the traditional criteria through which human resources are evaluated. Regarding the output, there are, of course the traditional financial documents as balance sheet, or annual financial report, etc. But they give us little information about what really constitutes this 15
16 business, as well as what future output we can expect provided we buy it. Therefore in an attempt to evaluate his company the manager comments: We are as good as the people within the business (Interviewee 2, Scotland). There is not much difference in Finnish context. The manager of a small, but highly valued Finnish tourist enterprise (chain of hotels), who defines himself as an experienced entrepreneur successfully running his business for over 20 years comes across similar problems. When asked to describe the value creation process and the outcome using the traditional approach he could just mention the annual turnover, the number of guests they have served, etc. However he could not take into account the impact his knowledge and experience plays in running these two hotels. Even, if the human resources are evaluated the evaluation again at its best will be based on criteria, such as: number of people, their training, skills etc. But what he finds as really an important factor, determining the outcome of his business is the talent and the soft skills of these people, as well as the communication and networking, building the image of the enterprise. What is worth noting while investigating how IC and thus HC is perceived in relation to the value creation and competitive advantage is the wider acknowledgement (though sometimes not so explicitly stated) among SMEs managers that in practice people, through their knowledge and their ability to develop and acquire new knowledge can be regarded theoretically as an unlimited resource or an abundant resource. The analysis of the qualitative data gives some evidence that the business activity of the enterprises under study involves not only physical and financial capital, but intellectual capital represented through the transformation of human capital, to structural and relational capital. Further, due to the central role of the human capital the impact of one additional factor tightly linked to HC, RC, SC and thus IC has been recognised well-being. In practice the in-depth analysis leads to the conclusion that this factor directly impacts on the economic value generated as a result of the company activity. Following these consideration we would like to suggest a revised version of the ICVC model (Fig. 2). Tangible resources Tangible Capital Physical and Financial Tangible output Monetary revenue Intangible resources Intangible Capital Intellectual Capital and Well-being Intangible output Non monetary benefit Figure 2 Intellectual Capital-based Value Creation Model (ICVC Model) revised 16
17 Authors argue that a model acknowledging intangible outcomes, such as image, growth of the potential customers network and knowledge about customers is much more relevant in the contemporary KBE. The revised model suggested present capital as tangible comprising the physical and financial capital and intangible including the intellectual capital and well-being. Outcome should be considered both as tangible and intangible. It, on its hand, transfers either into monetary revenue or into non-monetary benefit. Finally, the loop closes, and the final outcome (revenue or benefit) can be re-invested in the form of tangible or intangible recourses. 7 Conclusions Comparative analysis of the data obtained from the interviews and the case studies shows that there are not substantial differences towards value creation in SMEs across the three countries. The analysis of the semi-structured interviews and the three case studies from the IT sector had led to the conclusion that on average over 70 per cent of the resources used by service sector companies are intangible. Most of the SME managers of the study enterprises had recognised not only: knowledge, competence and experience, but also soft skills as: attitude and understanding of business, as well as willingness and potential to learn, as curtail to the value creation. What is even more important is the fact that the success of the company depends substantially on the capability of the employee to understand what the business of the enterprise is about and what customer wants. This in practice impacts on the overall image (Sveiby, 1997) of the company. Therefore if we disregard the use of the ICVC model what we will get as information will be limited to financial documents of the studied companies, some approximate information about their market share, growth, the number of employees (and probably their education and qualification), and possibly image of customers. This information does not provide adequate picture of the real value a business has. Present strategy management models do not consider the value gained as a result of the quality and quantity of the loyal customers. However evidence shows that most of the managers of the studied SMEs recognise the importance of IC and well-being and intuitively take them into consideration in their practice. An example, proving the importance of the intangibles is the fact that most of the studied companies had a pointed their customers on their website. Further to this some success stories about the experiences of their customers were also shared. This comes to 17
18 shows once again that present strategy management models are too narrow, and limited to show the true value of an enterprise. References Ahonen, G. (2000) Generative and commercially exploitable intangible assets. Classification of intangibles, Chamber De Commerce et D Industrie De Paris. CR 712/2000. Barney, J.B. (1986) Strategic factor markets: expectations, luck and business strategy, Management Science, Vol. 32 No.10, pp Barney, J.B., (1991) Firm Resources and Sustained Competitive Advantage, Journal of Management, Vol. 17, No. 1, pp Bontis, N. (1998), Intellectual capital: an exploratory study that develops measures and models, Management Decision Vol. 36 No. 2, pp Bontis, N., Dragonetti, N.C., Jacobsen, K. and Roos, G. (1999), The knowledge toolbox: a review of the tools available to measure and manage intangible resources, European Management Journal, Vol. 17 No. 4, pp Edvinsson, L. (1997), Developing intellectual capital at Skandia, Long Range Planning, Vol. 30 No.3, pp European Commission, EUROSTAT, Europe in figures, EUROSTAT yearbook European Commission, EUROSTAT, Europe in figures, EUROSTAT yearbook Galabova, L. and Ahonen, G (2011) Is intellectual capital-based strategy market-based or resource-based? On sustainable strategy in a knowledge-based economy, Journal of Human Resource Costing and Accounting, Vol. 15, No.4, pp Grant, R.M. (1996), Developing model for managing intellectual capital, Strategic Management Journal, Vol. 17 No.10, pp Kaplan, R.S. and Norton, D.P. (1992), The balanced scorecard measures that drive performance, Harvard Business Review, Vol.70 No.1, pp Mouritsen, J. (1998), Driving growth: economic value added versus intellectual capital, Management Accounting Research Vol. 9, pp Mouritsen, J. (2004), Measuring and intervening: how do we theorize intellectual capital management?, Journal of Intellectual Capital Vol. 5 No.2, pp Nelson, R.R. and Winter, S.G. (1982) An Evolutionary Theory of Economic Change, Belknap Press of Harvard University Press, Cambridge, MA. Nonaka, I. and Takeuchi, H. (1995), The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation. Oxford University Press, New York, NY. Penrose, E.T. (1959), The Theory of the Growth of the Firm. Oxford: Oxford University Press. 3 rd edn. Porter, M.E. (1985) Competitive Advantage. New York: Free Press. Porter, M.E. (1986) Competition in Global Industries, Harvard Business School Press, Boston. Roos, G., Bainbridge, A. and Jacobsen, K. (2001), Intellectual capital analysis as a strategic tool, Strategy & Leadership, Vol. 29 No3, pp Roos, G., Pike, St. and Fernström, L. (2005), Managing Intellectual Capital in Practice. Butterworth-Heinemann, Elsevier. USA. Rumelt, R.P. (1984) Towards a strategic theory of the firm, in Lamb, R.B. (ed.), Competitive Strategic Management, Prentice Hall, Englewood Cliffs, NJ, pp Punch, K. (1998) Introduction to Social Research: Quantitative and Qualitative Approaches, London, Sage 18
19 Scottish Annual Business Statistics, Available at < last accessed, 10 April, 2011 Spender, J.-C. (1989), Industry Recipes: An Enquiry into the Nature and Sources of Managerial Judgment. Basil Blackwell. Stewart, T.A. (1997), Intellectual Capital: The New Wealth of Organizations. Doubleday/Currency, New York, NY. Sveiby, K.E. (1997), The New Organizational Wealth: Managing and Measuring Knowledge-based Assets, Berrett-Koehler, San Francisco. Sveiby, K.E. (2001), A Knowledge-based theory of the firm to guide in strategy formulation, Journal of Intellectual Capital Vol. 2 No.4, pp Tilford, S. and Whyte, Ph., The Lisbon scorecard X: The road to 2020, Centre for European Reform, London. Wernerfelt, B. (1984) A resource-based view of the firm, Strategic Management Journal, Vol. 5, pp Zack, M.H. (1999), Knowledge and Strategy. Butterworth-Heinemann. 19
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