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.

One definition of social capital

I love this international development blog's definition of social capital: "the sum total of all the unselfish acts* that it's members perform". (* I'm not sure yet whether this includes acts of enlightened self interest or only altruism.)

Social capital

From my book:

Social or relational capital is an emergent property arising from the organisational system – the organisation and the people working in the organisation. Social capital includes the network of relationships and features of social life within an organisation, the knowledge tied up and shared in these relationships, the ability to work together with other people in value creation, the corporate culture, beliefs lived and values demonstrated by employees. It provides the glue that holds organisations together. Social capital is even less tangible than human capital and demonstrates even more attributes of complex systems. How is this for a paradox: it is not owned by the people but leaves when they leave and is not contained within the organisation but does not exist in the same way without it:

‘Social capital is owned jointly by the parties in a relationship, and no one player has, or is capable of having exclusive ownership rights’

(Nahapiet and Ghoshal)

It cannot be managed but it can be influenced, mainly through conversation. I also think that there are some signs of a positive feedback loop here. As social capital along with other intangibles becomes more important, so it needs to be increasingly socially constructed which needs effective conversations. This increases the importance of social capital, which requires it to be socially constructed, ad infinitum.

Organisation capital

From my book:

Organisation or structural capital is the infrastructure that supports people to do their work. It includes elements like the fitness of the organisation structure, operational and management processes, procedures, routines, general use of information, IT systems and databases, existence of a knowledge centre, explicit knowledge and know-how. Some of these elements may be legally protected and become intellectual property rights, legally owned by the firm, for example patents, copyrights, design rights, trade secrets, trademarks and service marks. Organisation capital has the advantage of being fully owned by the company – it remains in place when the employees leave - and is therefore to some extent easier to manage and change than human capital.

Human capital

From my book:

Human capital exists as a resource and a capability, at individual and organisational levels. Individual human capital can be acquired by attracting and selecting staff with the right skills and experience. It can be developed through learning. Human capital can be converted into an organisational resource by aligning people with the organization, engaging its owners and investors, so that they will choose to make it available to the organisation. This can then be leveraged by applying it to meet business requirements.

What's this Social Business thing about?

I've been blogging about human capital management (HCM) for a few months now, and have explained that I see this, not as the management of people AS human capital, but the management of people FOR human capital. HCM is an approach that invests in the accumulation and development of human capital as an intangible basis for ongoing competitive advantage.

However, I actually believe that there are three main intangibles in an organisation, which are human, organisation and social capital. And out of these, I think it is social capital that provides the greatest opportunity for business competitiveness. This is partly because of the new possibilities provided by social media, and the new expectations of the millennial generation. It's also because it's becoming increasingly apparent that the traditional way of managing organisations isn't working very well.

I'm defining the social business (I'm calling it the new social business to differentiate it from those organisations devoted to dealing with social causes) as an organisation that takes advantages of these opportunities.

This is an area that I don't think many people know much about, and I will admit to feeling fairly unknowledgeable about it myself. So whereas in my other blog, I feel about to comment as an expert about human capital, I have set up this one to support a personal journey of learning. But I hope that readers will want to take this journey with me as well.

And I also hope that my understanding of HCM, and aspects such as best fit,intangibility and complexity, as well as specific tools, such as the HCM value matrix, described within my book, will help me add something new to this field.