Saturday, 24 November 2007

Examples of intangible capability

From my book:

In some ways, there is little new in these categorisations of value. For example, McKinsey’s 7’S’ model basically consists of different elements of human, organisational and social capital:

· Human capital = staff and skills
· Organisation capital = strategy, structure and systems
· Social capital = super-ordinate goals and style

The advantages of conceptualising these areas as forms of intangible value are firstly that this ensures a focus on the outcomes of people management activities, rather than the activities themselves. Secondly, this emphasizes that given their different nature, the three types of capital each need treating in different ways.

More recently, Dave Ulrich has identified eleven intangible capabilities he believes are important to business effectiveness and that I have categorised as follows:

Customer capital
· Customer connectivity: building enduring relationships or trust with targeted customers

Human capital
· Talent: attracting, motivating and retaining competent and committed people
· Leadership: embedding leaders throughout the organisation

Organisational capital
· Speed: making important changes rapidly
· Accountability: demanding high performance from employees
· Learning: generating ideas with impact
· Innovation: developing breakthrough products and processes
· Efficiency: managing costs

Social capital
· Shared mind-set and coherent brand identity: ensuring positive, consistent perceptions of the company among employees and customers
· Collaboration: working effectively across organisational boundaries
· Strategic unity: articulating and sharing a strategic viewpoint

Ulrich also describes how an organisation needs to pick intangibles that fit with its business strategy, emphasizing, for example:

· Collaboration if the business strategy is about managing alliances
· Learning if the strategy is about sharing knowledge across global business
· Talent if the employer is trying to grow in new industries
· Speed if the organisation is trying to compete on cycle time

The impact of Ulrich’s capabilities has been reviewed in Huselid’s research, described in chapter three. Huselid found that firms rated higher on these capabilities also invest more in R&D (an indirect measure of innovation); are more productive and more profitable. The ratio of market to book value was also found to be nearly four times larger in the highly rated firms.

The Work Foundation has recently conducted research placing 3000 companies in a league depending on how they handle customers and markets; shareholders and governance systems; stakeholder relationships; human resources practices and the management of innovation and creativity, which together, form an overall Company Performance Index (CPI). During a thirteen month period when the UK stock market grew by fourteen per cent, companies at the top of the Work Foundation’s index experienced a twenty six per cent gain in market value and companies at the bottom of the index gained just a six per cent increase. The Work Foundation has identified five ‘intangible factors of production’ that translate the five process areas of the CPI into productive action. Again, using my categorisations, these intangibles are:

Human capital
· Leadership: visible and accessible leadership and management, combined with high expectations from those in decision making roles

Organisation capital
· Structure: unique organisational structure resulting from geography, size and history, that enables continued success rather than being a specific driver of that success
· Process: a higher degree of informality and continued dialogue supported by simple – though not simplistic – processes that allow faster decision-making

Social capital
· Communication: openly sharing information between peers and networks or managers than need timely and accurate information in order to get the best job done
· Culture and Employee Relations: a distrust of the status quo, valuing quality rather than quantity, a focus on the long-term and on outcomes; a positive climate characterized – not codified – by pride; innovation and strong interpersonal relations,

The research found that that there are radical differences in these intangibles between top scoring and bottom scoring firms. High performing companies have a higher degree of dialogue and value quality rather than quantity. Poor performers tended to have a bureaucratic and hierarchical culture, with leaders more concerned with a narrow range of financially driven output metrics than how top managers behave and interact with others.

The Work Foundation's report concluded that achieving high performance is about developing best fit between a company’s strategic choices over their business goals and the practices they choose to achieve these goals. It also noted that:

"The exact ‘fit’ will depend on a myriad of external and internal factors such as history of the organisation, its geography, its sector and its position within that sector."

Whilst these lists of human, organisation and social capital may appear to be very similar to a list of best practices, there is a crucial difference in that they are actually the results of best practices rather than the practices themselves. For example, developing leadership skills is a practice; the ability to lead change is an intangible capability.

But there can be overlap. For example, organisation capital exists to support people in the organisation – either by enabling business processes, supporting customer activities or by directly improving financial performance (for example an intangible capability to meet forecast projections). But organisation capital can also support people management so, for example, developing leadership skills could be organisation capital, as well as a practice, if the organisation is as effective as GE in developing senior executives and ensuring smooth succession into top jobs. The key issue in understanding whether something has intangible value is whether it is something that is so strongly valued that investors would pay for the organisation to have it.