Intellectual Capital and Knowledge Management. Performance Measurement and Challenges

Academic Paper, 2017

13 Pages, Grade: 78



1. Intellectual Capital
1.1. Intellectual capital categories

2. Knowledge Management
2.1. Aspect of Measurement
Communities of Practice/Interest

3. Performance Measurement and Challenges
4.1. Wrong Designing
4.2. Lack of leadership commitment
4.3 Ignoring change management in system implementation
4.4. Absence of Integration




Abstract: The current paper discusses the Gray’s statement: “Before we measure something we must ask whether we understand what it is we are trying to measure” (Gray, et al., 2015), relating it to business performance management and management information system theories. With today’s knowledge management which involves the way of organizing humans and the use of computers to manage information systems, the paper highlights the importance of hidden values (intellectual capital) in business success, the knowledge and performance management and measurement techniques, challenges as well as how communities of practice are managing to solve real firm’s problems and help it meet its goals. It was argued by Gray (2015) that all businesses operate with specific sets of activities that result to their deliverables. The most challenging and important discussion topic, is how these business processes are effectively managed and measured against the firm’s objectives as well as how companies measure the contribution of their intangible assets to business outcomes.

Key words: Strategic Systems Thinking, Intellectual capital, Knowledge Management, Aspect of Measurement, Performance management, Community of Practices.

1. Intellectual Capital

Bernard H. N. (2017) defines an intellectual capital as the intangible assets of an organization resulting from employees' physical efforts, knowledge assets and other results of human innovation and thoughts. Due to firms that have neglected intellectual capital to focus on finance and operations for many years, Leif E. (1991) describes intellectual capital as a hidden value and explains its importance on the company value. Intellectual capital, as argued by some scholars and authors, including Edvinsson, can take many forms.

1.1. Intellectual capital categories

Bernard (2017) distinguishes the four major components of intellectual capital assets such as the legally recognized assets, the legally salable and protected intangible assets, structural intangible assets and the human capital intangible assets. However, Edvinsson and Malone talks about the three main forms of intellectual capital which are “human capital, structural capital and customer capital”.

According to them, human capital includes knowledge, skills, and abilities of employees. It’s by using the human capital that an organization solves a set of business problems. It is inherent property of people that can’t be owned by an organization without people. Therefore, human capital is a property of an organization that can be lost at any time, once people leave the organization. Human capital entails how an organization uses its people resources in an efficient and effective way as measured by creativity and innovation (David H., 2009).

Structural capital is any other thing in an organization that serves as a supportive infrastructure to enable human capital to function. Now structural capital is an inherent property of an organization which can remains with an organization even after people have left. This component includes that which is left after employees go away such as policy, database systems, hardware or software as well as other patents, and trademarks. The structural capital being very wide, with several components Edvinsson and Malone (1997) classify them into three major components: organizational, process and innovation capital.

While the Process capital includes the entire set of procedures, techniques and programs that implement and enhance the delivery of goods and services, Edvinsson and Malone (1997) defines the Organizational capital to include the philosophy and systems that maximizes the organization’s capability. “Innovation capital includes intellectual properties and intangible assets” they added. Apart from these two categories of intellectual capital, customer capital is the central element of an organization.

David H. (2009), describes the customer capital as the company’s strength and loyalty of customer relations. This implies how Customers are satisfied, how are they financially well off? Do they come back to purchase the product or service, etc. As price sensitivity may be used as indicators of customer capital, David argues that this last “indicates its central importance to an organization’s worth since it’s even separate from human and structural capital”. “The relationship with customers is distinct from other relationships either within or outside an organization”. Added David!

In all, only few people or organizations consider the value of human knowledge and strive to receive, reapply and protect it. It may have no real value to business firms but once effective knowledge-sharing practices are operational, they can provide to firms, a lasting competitive advantage that maximizes their competitive power.

2. Knowledge Management

In business context, knowledge management (KM) is a very recent interdisciplinary model which mostly deals with the promotion of learning and innovation (Gotcha 1999). This practice which encloses the creation and sharing of different knowledge assets, encompasses the multiple areas of business processing in any company. The major purpose of knowledge management is to develop the company’s intellectual capital which is the “capability of an organization to generate creative and effective responses to its potential challenges facing it, in an ongoing manner” (Rastogi, 2000, p. 39).

Rastogi P.N. (2002) also defined the firm’s knowledge management nexus as a “dense, dynamic, and mutually supportive interactive pattern of its social capital (SC), human capital (HC), and knowledge management (KM)”. Here the term ‘nexus’ stresses on the interdependence of the three components such that in absence of one, the entire module cannot exist. It’s therefore by using Intellectual capital that a firm succeeds to overcome surrounding challenges and exploit opportunities in its surrounding. This is more common in the current era .

Contrary to the unfashionable age, in modern businesses knowledge management is a very important aspect to the success of any company. In this regard, the success of company relies more on the use of the existing and new knowledge assets, adapted to the current business environment/situation for a better decision making. Rastogi (2000) highlights that nowadays company’s competitiveness depends on this intangible asset, hence acquisition and effective utilization of knowledge is becoming an important factor to business success. In order to succeed in today’s challenging business environment, “companies need to learn from their past errors and not reinvent the wheel”, argues Bill Wolf (2001). It’s now clearer that knowledge is an important asset for an organization to thrive and cope with the surrounding challenges. This assigns a big task to companies create effective knowledge management systems.

Despite the focus on IT infrastructures in the creation of knowledge management systems, may authors indicate that there is a number of other factors which must be considered. It was also made clear that this idea behind building effective knowledge management systems is to facilitate employees have access and their knowledge to improve the overall business. However, Lin, C et al. (2008) argues that very few firms are enjoying the desired performance outcome, resulting the big investment in computerized infrastructures. Therefore, “increasing IT investment do not ensure better business performance or distribution of information among employees” (Lin, C et al., 2008). According to this author, the success of knowledge management relies on the coordinated use of knowledge encompassing the coordination of people and techniques within the organization, rather than focusing on a single factor. “The combination of information technology and personal drive to obtain knowledge within an organization is influencing the method and effectiveness of knowledge acquisition”, added Lin, C et al. (2008).

Nevo, D. (2003) highlighted the lack of understanding of the user requirements as the main reason why IT infrastructures do not support effective knowledge management. Even if different organizational knowledge management requirements can be supported by IT tools, firms are required to apply several IT tools and incorporate different functionalities in order to obtain desire knowledge management solution; which makes the knowledge management environment more inefficient.

Generally the successful knowledge management relies on both the creation of an environment to share knowledge and expertise among employees as well as the use of some specialized technologies (Hislop, D., 2005). However, Riege, A. (2005), argues that the proper allocation of skilled personnel can help in the creation of an effective knowledge sharing environment, providing both the necessary infrastructures and enough resources to ease the knowledge –sharing practices. This involves both the quality of knowledge to be shared and other human or social factors. Communities of practice are one form where members are practitioners who share experience, stories and deal with the actual problems in the firm.

2.1. Aspect of Measurement

Nonaka (2008) refers to the theory of tacit and explicit knowledge to explain how knowledge can be measured. According to him, every employee has a subjective perception that s/he brings to the community of practice (i.e. tacit knowledge). Explicit knowledge results from the company’s process that measures the performance. One would wonder how tacit knowledge becomes explicit knowledge in terms of business success but according to the writer, only some components are given priority depending on the type of business. For example, the Essex police performance management framework presented by Marr (2015), does not look like an measurement tool but a consultancy one, where Marr (2015) points out that the consideration of several performance indicators is the main challenge observed in designing such performance methodology (Leonidas, 2017). The more appropriate tool will only consider some key performance indicators (KPIs) to evaluate the employee’s performance. It’s only by considering some key performance indicators that an employee will be judged knowledgeable or not.

It’s a responsibility of any business firm to develop evaluation methodologies such as that presented by Marr (2015) or other methodologies for measurement like the use of the balanced scorecard, adopted to the internal dynamism and business complexity.

The techniques used at Skandia represent a good example of methodology that any business firm may adapt but requires much more customizations in order to measure business performance. It usually requires a proper understanding of the business nature and environment in order to successfully manage its information system and the entire business process (Edvinsson, 1997). Therefore, every firm should have a particular performance measurement techniques, relevant to the business nature, business process and goals. Peter Drucker (1974) argues that financial aspect shouldn’t be a reference point to measure business performance because it does not access how communities of practice are “implementing and executing through the management information system on a daily basis”. Hence, firms are required to find new/particular ways of measuring their business performance.

Communities of Practice/Interest

Communities of practice are informal and self-selected groups of people who share the same expertise as well as the passion for a topic. For example in my organization, a team of project managers who meet regularly to exchange ideas on the actual humanitarian situation is a community of practice. Generally, they meet on a weekly basis but keep connected via emails and other social networks. Etienne C and William M (2000) argue that even if the community of practice may not have a clear agenda or the output knowledge are intangible, these communities of practice are known on the ability to improve the company’s performance. It is through these communities of practice that strategies are driven where participants can develop new business lines, develop professional skills, help the company to recruit and retain the best talents and share the best practices.

Even if the communities of practice add value to the company in several ways, the term itself is very recent in business vernacular. Although very few proactive companies have nurtured them, it’s not particularly easy to form, integrate communities of practice with the rest of organization and sustain them (Etienne and William, 2000). However, communities of practice are usually different depending on the reason for their existence. For instance people is the same company can choose to form a community of practice to maintain the connections with peers, due to the company’s decision to reorganize; people outside or inside the company may also form a community of practice, resulting the changes or new emergent strategy. In all cases, communities of practice can exist within the business unit or cross the divisional boundaries and there is no limit in the number of participants, except when larger communities of practice subdivide into geographical regions.

These commonly self-selected groups generate knowledge, especially if they are focusing on work related problems, they make the work easier. Even if, it requires investing time or money, Lesser J. Storc (2001) advise the managers to sustain communities of practice within their companies by identifying the potential groups able to enhance the company’s strategic capability, provide them with the necessary infrastructures and use the nontraditional methods to assess their values on the company’s progress. Here the best advised way is to listen to members ‘stories in a systematic way.


Excerpt out of 13 pages


Intellectual Capital and Knowledge Management. Performance Measurement and Challenges
University of South Wales  (Business School)
Strategic Systems Thinking, Tools and Techniques
Catalog Number
ISBN (eBook)
ISBN (Book)
Strategic Systems Thinking, Intellectual capital, Knowledge Management, Aspect of Measurement, Performance management, Community of Practices.
Quote paper
Dr. Sixbert Sangwa (Author), 2017, Intellectual Capital and Knowledge Management. Performance Measurement and Challenges, Munich, GRIN Verlag,


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