Universität-Gesamthochschule Paderborn
Fachbereich Wirtschaftswissenschaften

Diplomarbeit / Diploma Thesis

Performance Measurement from the Intellectual Capital Perspective -

A theoretical approach to support a corporate performance measurement
system through a groupware-based intranet application

SS 2000

by

Vincenz M. Behn

Studiengang: International Business Studies

Content

Figures ... III
Tables ... IV
Abbreviations ... V

1 Introduction ... 1

2 Strategic Management in the Information Age ... 4
2.1.1 The Industry-Based View of the Firm ... 5
2.1.2 The Resource-Based View of the Firm ... 7
2.2 A New Type of Organization ... 8
2.2.1 Characteristics of the New Organization ... 8
2.2.2 New Organizational Forms ... 9
2.2.3 New Strategies ... 10
2.3 Value Creation in the Information Agev ... 12

3 Intellectual Capital ... 16
3.1 Shortcomings of Traditional Accounting Methods ... 16
3.2 Economics of Knowledge-Based Resources ... 18
3.3 The Concept of Intellectual Capital ... 20
3.3.1 Human Capital ... 22
3.3.2 Structural Capital ... 25
3.3.3 Customer Capital ... 27

4 Performance Measurement with the Balanced Scorecard ... 32
4.1 Financial Perspective ... 34
4.2 Customer Perspective ... 36
4.3 Internal Business Process Perspective ... 37
4.4 Learning and Growth Perspective ... 39
4.5 The BSC as a Strategic Management System ... 40
4.5.1 Cause-and-Effect Relationships ... 41
4.5.2 Implementing a Balanced Scorecard ... 42
4.5.2.1 Clarifying and Translating Vision and Strategy ... 44
4.5.2.2 Communicating and Linking ... 44
4.5.2.3 Planning and Target Setting ... 45
4.5.2.4 Strategic Feedback and Learning ... 46
4.6 A Critical Look at the Balanced Scorecard ... 47

5 Enabling the Balanced Scorecard ... 50
5.1 Requirements for an Automated Balanced Scorecard ... 52
5.1.1 Strategic Requirements ... 53
5.1.2 Technical Requirements ... 54
5.1.3 A Critical Look at Automated Balanced Scorecard Solutions ... 59
5.2 NetFicient ... 61
5.2.1 NetFicient Add-Ons ... 64
5.2.2 NetFicient Knowledge ... 65
5.2.3 eSurvey and NetFicient Project ... 66
5.2.4 A Critical Look at NetFicient to Support a Balanced Scorecard ... 67
5.3 Conclusion ... 69

6 Outlook ... 71

Appendix ... 73
A-1 The Structural Analysis of Industries – Porter’s Five Forces ... 73
A-1.1 Threat of Entry ... 73
A-1.2 Intensity of rivalry among existing competitors ... 74
A-1.3 Pressure from substitute products ... 75
A-1.4 Bargaining power of buyers ... 75
A-1.5 Bargaining power of suppliers ... 75
A-2 Sveiby’s Balance Sheet of Intangible Assets ... 76
A-3 Intellectual Capital Measures ... 78
A-3.1 Financial Perspective ... 78
A-3.2 Customer Perspective ... 79
A-3.3 Internal Business Process Perspective ... 81
A-3.4 Learning and Growth Perspective ... 82

Bibliography ... 83

1 Introduction

The transformation from the industrial age to the information age¹ or knowledge society² represents a time of great change for business organizations as well as for individuals. Service industries replace manufacturing industries and the traditiona factors of production: land, labor, and capital are replaced by intellectual assets as the scarce resources. "If there is one distinguishing feature of the new economy that has developed as a result of powerful forces such as global competition, it is the ascendancy of intellectual capital."³ Intellectual capital (IC) and its measurement is the main topic of this research project. The declining importance of physical assets as well as the quest for shareholder value creation have made the performance evaluation of companies that used to be solely based on financial figures inadequate. For information age companies it is essential to value performance beyond quantitative measures.⁴ Practitioners like Security Exchange Commissioner (SEC) Steven Wallmann as well as academics like New York University’s Stern School of Business accounting professor Baruch Lev stress the current accounting model’s bias towards physical assets and emphasize the necessity of incorporating non-financial measures to evaluate organizational performance.⁵ The Balanced Scorecard (BSC) is a performance management and measurement system that fulfills this criterion. In addition to the traditional Financial Perspective, the BSC measures performance from the Customer Perspective, the Internal Business Process Perspective, and the Learning and Growth Perspective, thereby functioning as a tool to navigate businesses in a competitive environment that is growing more and more complex. The aim of the thesis is to illustrate how the BSC can be used as a strategic management system that places a strong focus on IC and its measurement. Furthermore, it will be analyzed how information technology (IT) can be used to facilitate a BSC and its implementation.

The research project is based on a cooperation between Deutsche Bank AG and the Groupware Competence Center of the University of Paderborn. Along with Lotus Development GmbH, the two cooperation partners developed the product NetFicient, a groupware-based intranet application. NetFicient is marketed by the Deutsche Bank Performance Measurement from the Intellectual Capital Perspective – Introduction department GTS/Commercial Banking Applications/eCommerce/eCommunities internally as well as externally. The increasing utilization of BSCs was the reason to examine how potential NetFicient customers could benefit from the various NetFicient functions when introducing a BSC.

The paper begins with an introduction to Strategic Management in Chapter 2. It is intended to provide a brief overview of the historical evolution of strategy in management literature. The most important frameworks are going to be mentioned, however, the center of attention are the changes in the competitive environment that organizations have to cope with nowadays. Therefore, an emphasis is placed on the strategic prerequisites companies have to accomplish in order to successfully compete in the ‘new economy’. Besides, the shifting perception about value creation will be briefly illustrated. Chapter 3 will deal with IC. The above mentioned shortcomings of traditional accounting will be explained with a focal point on economics of knowledge-based resources. Furthermore, the IC concept will be illustrated and explained. A case study about Skandia, a Swedish financial services and insurance company will be leading on to the BSC concept, presented in Chapter 4. The potential of the BSC to function as a strategic management system - focusing on performance measurement from the IC perspective by adding non-financial measures to the traditional financial ones - will be examined. In Chapter 5 enabling systems for BSCs will be discussed. On the one hand, automated BSC solutions are going to come under scrutiny and on the other hand it will be assessed how NetFicient can contribute to a BSC process.

2 Strategic Management in the Information Age

The word strategy has its roots in the Greek language where strategia means generalship (formed from stratos – the army). It is not a coincidence that concepts and theories of corporate strategy or business strategy go back to a military background. Strategic management professors Henry Mintzberg and Brian Quinn even start their book on ‘The Strategy Process’ with a lengthy description of the battle of Chaeronea where Alexander the Great from Macedonia defeated the Athenian and Theban troops in 338 BC by carefully analyzing the strengths and weaknesses of his own troops as well as looking at the troops of his opponents.⁶ Robert M. Grant, another leading researcher on strategic management outlines two similarities between military and business strategy: the distinction between strategy (“the science or art of planning and directing large-scale military movements and operations”⁷) and tactic (“a plan, procedure, or expedient for promoting a desired end”⁸). According to Grant tactic is the scheme to win a specific battle while a strategy is the means to win the whole war.⁹ He emphasizes three common characteristics of strategic decisions military as well as business-related: ¹⁰

[...]

1 Stewart (1997): p. 3

2 Drucker (1996): p. 67

3 Bontis (1998): p. 64

4 Eccles (1991): p. 131

5 Lev (1997): p. 1; Wallman (1997): p. 104

6 Mintzberg/Quinn (1991): p. 6

7 N.n. (1997): p. 778 (Webster’s Universal College Dictionary)

8 N.n. (1997): p. 802 (Webster’s Universal College Dictionary)

9 Grant (1998): p. 15

10 Grant (1998): p. 15