Emj Apion Case Study

8/8/2019 Emj Apion Case Study

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USING AN INTELLECTUAL CAPITALPERSPECTIVE TO DESIGN ANDIMPLEMENT A GROWTH STRATEGY:

THE CASE OF AP ION

A U T H O R S :A U T H O R S :

J o e P e p p a r dS en i o r R es ea rc h F e l l ow

C r a n f ie ld S c h o o l o f M a n a g e m e n t

Cran f i e ld Un ive rs i t y

C ran f i e l d ,

B ed fo r d M K 4 3 0 A L

Te l: + 4 4 1 2 3 4 7 5 4 4 7 7 j . p e p p a r d @ c r a n f i e d . a c . u k

A n n a R yla n d e rS e n io r C o n s u l t a n t

In te l lec tua l Capi ta l Serv ices

B o u v e r i e H o u s e

1 5 4 -1 6 0 Fle et S t r e e t

L o n do n EC4 A 2 D Q

Te l: +4 4 2 0 7 6 9 4 6 1 0 0 a n n a . r y l a n d e r @ i n t c a p . c o m

M A N U S C R IP T FOR :M A N U S C R IP T FOR :

Eu r o p ea n M a n a ge m e n t J o ur n a l, 2 0 0 1 (f o r t h c o m in g )

A B S T R A C TA B S T R A C T

T h is p a p e r u s e s t h e c a s e o f t e le c o m m u n ic a t io n s s o f t w a r e c o m p a n y T h is p a p e r u s e s t h e c a s e o f t e le c o m m u n ic a t io n s s o f t w a r e c o m p a n y

A P i ON t o i l lu s t r a t e h o w t h e c o m p a n y d e ve lo p e d a n d i m p le m e n t e d a A P i ON t o i l lu s t r a t e h o w t h e c o m p a n y d e ve lo p e d a n d i m p le m e n t e d a

g r o w t h s t r a t e g y t h a t a l g r o w t h s t r a t e g y t h a t a l lo w e d i t t o r e a l ize a d r a m a t ic i n c r e a s e i n lo w e d i t t o r e a l ize a d r a m a t i c in c r e a s e i n s h a r e h o l d e r v a l u e t h r o u g h p r o a c t i v e l y f o c u s i n g o n h a r n e s s i n g i t s s h a r e h o l d e r v a l u e t h r o u g h p r o a c t i v e l y f o c u s i n g o n h a r n e s s i n g i t s

in t e lle c t u a l c a p it a l (IC ) r e s o u r c e s . H a v in g s u r ve ye d t h e l it e r a t u r e o n in t e lle c t u a l c a p it a l ( IC ) r e s o u r c e s . H a v in g s u r v e ye d t h e l it e r a t u r e o n

va lu e c r e a t io n , c a t e g o r iz in g i t u n d e r f in a n c ia l a n d e c o n o m ic ,va lu e c r e a t io n , c a t e g o r iz in g i t u n d e r f in a n c ia l a n d e c o n o m ic ,

s t r a t e g ic , m a n s t r a t e g ic , m a n a g e r ia l a c t io n , a n d r e s o u r c e a g e r i a l a c t i o n , a n d r e s o u r c e - - b a s e d p e r s p e c t i v e s , t h e b a s e d p e r s p e c t i ve s , t h e

p a p e r n o t e s t h a t a m a jo r c r i t ic is m t h a t c a n b e l e ve le d a t a l l t h e s e p a p e r n o t e s t h a t a m a jo r c r it ic is m t h a t c a n b e l e ve le d a t a l l t h e s e

p e r s p e c t iv e s is t h a t t h e y a r e w e a k in id e n t i fyin g s p e c i f ic a c t i o n s a n d p e r s p e c t ive s i s t h a t t h e y a r e w e a k in i d e n t i fy in g s p e c if ic a c t i o n s a n d

in m o b i liz in g o r g a n i za t i o n a l r e s o u r c e s t o in c r e a s e s h a r e h o l d e r v in m o b i liz in g o r g a n i za t i o n a l r e s o u r c e s t o i n c r e a s e s h a r e h o l d e r v a lu e .a l u e .

Eve n r e s o u r c e Eve n r e s o u r c e - -b a s e d t h e o r y (R B T ) fo c u s e s o n t h e d e v e lo p m e n t a n d b a s e d t h e o r y (R B T ) f o c u s e s o n t h e d e ve lo p m e n t a n d

p r o t e c t io n o f v a lu a b le r e s o u r c e s r a t h e r t h a n o n p r o v id in g a t h e o r y o f p r o t e c t io n o f v a lu a b le r e s o u r c e s r a t h e r t h a n o n p r o v id in g a t h e o r y o f

r e s o u r c e s in a c t io n . T h e IC p e r s p e c t ive h a s e m e r g e d a lo n g s i d e r e s o u r c e s in a c t i o n . T h e IC p e r s p e c t ive h a s e m e r g e d a lo n g s i d e

R B T a s a c o m p le m e n t a r y vie w p o i n t b u t h a s a d i s t in c t R B T a s a c o m p le m e n t a r y v ie w p o i n t b u t h a s a d is t i n c t ive p r a c t i t io n e r iv e p r a c t i t io n e r

b e n t e m p h a s iz in g r e s o u r c e a c c u m u la t io n a n d d e p lo ym e n t i n t h e b e n t e m p h a s iz in g r e s o u r c e a c c u m u la t io n a n d d e p lo ym e n t i n t h e va lu e c r e a t io n p r o c e s s . T h is p a p e r p r e s e n t s t h e k e y t e n e t s ,va lu e c r e a t io n p r o c e s s . T h is p a p e r p r e s e n t s t h e k e y t e n e t s ,

c o n c e p t s a n d l a n g u a g e o f t h e I C p e r s p e c t i v e , i l l u s t r a t i n g i t s c o n c e p t s a n d l a n g u a g e o f t h e I C p e r s p e c t i v e , i l l u s t r a t i n g i t s

im p le m e n t a t io n u s i n g t h e c a s e o f A P iO N . It c l o s e s w it h im p le m e n t a t io n u s i n g t h e c a s e o f A P i ON . It c l o s e s w i t h s o m e s o m e

le s s o n s a n d i m p lic a t i o n s f o r k n o w le d g e in t e n s ive b u s in e s s e s .le s s o n s a n d i m p lic a t i o n s f o r k n o w l e d g e i n t e n s ive b u s in e s s e s .

KEYWORDS: I NTANGIBLE ASSETS, I NTELLECTUAL CAPITAL, VALUE CREATION PROCESS,

KNOWLEDGE, SHAREHOLDER VALUE

I CS L t d , 2 0 0 1 A ll R igh t s R es e r ved . N o pa r t o f t h is pub l ic a t i on m ay be r ep r odu c ed ,

s t o r ed in a r e t r ie va l s ys t em o r t r ans m it t ed i n any f o r m by any m eans w i t hou t t he

p r i or p e r m is s io n o f t h e A u t h o r s .


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HARNESSINGINTELLECTUAL CAPITAL

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1. INTRODUCTION

If there is one question that has dominated the deliberations of most seniormanagement teams over the decades it is how do we enhance shareholder value?

Answering this question must surely be the Holy Grail of management practice; and

there is no shortage of views about how this objective can be achieved. Indeed, whenthe stock market values a company at a valuation in excess of its shareholders funds,which is usually the case, it is taking a view on the wealth-creating potential of theorganizations resources, particularly those not valued or indeed identified in the

balance sheet. Many high tech companies have little by way of assets: buildings arerented, equipment and computers are leased. These companies depend entirely on

their intangible resources, particularly the skills and knowledge of employees. Whileassessing the value of such companies is fraught with difficulty, mobilizing theseintangible resources to create shareholder value presents a management challenge that

has not been adequately addressed in the research literature.

In the industrial era, the production function was relatively straightforward. The keyinput was financial capital, the economic behavior of productive resources wellunderstood (the dominance of decreasing returns), and the boundaries of the

organization were clear. Todays knowledge intensive companies struggle with amuch more complex environment. The primary input to these organizations value

creation processes is knowledge and other intangible resources to which the classiceconomic laws do not apply. In addition, the boundaries around such organizationsare less clear and other entities, traditionally seen as external, can make a significant

contribution to the value creation process of the organization.

Drawing on the emergent intellectual capital (IC) perspective, the paper reports on

research that explores the process of resource accumulation and deployment to createshareholder value. Specifically, it illustrates how telecommunications software

company APiON adopted the IC perspective to develop and implement a growthstrategy that focused on leveraging its intangible resources, allowing them to realize adramatic increase in shareholder value. It describes the process of how IC resourceswere identified, developed and deployed in shifting the company from being aservices business to becoming a leading provider of products to enable mobile phonenetworks interface with the Internet.

The paper first categorizes into a number of different perspectives, prescriptions and

theories of value creation found in the contemporary management literature, criticallyreviewing them to highlight weaknesses in their application to practice. It then moveson to review the IC literature, placing it within the context of main-stream strategicmanagement, in particular resource-based theory, tracing its origins and outlining itsdevelopment. A description of AP iON is then presented and an exposition of the IC

process it followed is then illuminated. The data and experiences of this organizationare then interpreted in the context of value creation and the lessons and implications

for others extracted.


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2. PERSPECTIVES ON VALUE CREATION

In order to ground the discussion in this paper, this section presents a brief overviewand critique of some of the principal prescriptions and theories regarding the creation

of value in organizations. These prescriptions are drawn from a wide range of

management disciplines and are grouped under four broad headings, each of whichreflects a particular viewpoint: financial and economic perspectives, strategicperspectives, managerial action perspectives and resource-based perspectives.

Financial and economic perspectives

Given that shareholder value1 ultimately has a financial implication, it is perhaps notunexpected that the financial and economic literature has devoted considerableattention to the question of shareholder value. A number of streams of researchwithin this perspective can be identified.

Significant work has been undertaken over the years in assessing the value of acompany, an activity that has received added impetus with the recent emergence of

dot.com companies. In valuing a company, analysts utilize a variety of approaches,all loosely based on net present value (NPV) calculations of future expected revenuesand cash flow streams. Within this genre, discretionary cash flow is seen as the key

driver of value.

At a more operational level, a major effort continues to be exerted by the financialcommunity to effect traditional financial reporting instruments such as balance sheets,

income statements and cash flows in order to boost shareholder value. For example,the financial treatment of stock options, so much part of the remuneration pack inmany high tech companies, actually inflate earnings per share (EPS) in a bull market.

During 1999, Standard and Poors 500 companies collected $15.5 billion in options-related tax benefits. Yet, such financial engineering, perhaps through manipulation ofbalance sheet items, can really only deliver a one-off increase in shareholder value (as

measured on the balance sheet) but more critically, it is not a practice that contributesto the value creation potential of the company.

Shareholder Value Analysis (SVA) has been proposed as a method for integratingfinancial management into the overall strategic planning process of the corporation

(Rappaport, 1986). The identification of value-drivers (such as sales margin) andtheir subsequent management is seen as the key to SVA. In a similar vein, Value-

Based Management (VBM) is a concept that attempts to focus management decisionmaking on key drivers of value. The basic premise of VBM is that to understandvalue creation one must adopt a long-term point of view, manage all cash flows on

both the income statement and balance sheet, and understand how to compare cashflows from different time periods on a risk adjusted basis (Copeland et al., 1996). As

value is analogous to discounted cash flow, its basic premise is that if more output isproduced with less input, then the residual, the shareholders value, is greater.However, while offering much promise, both fall short on practical implementation

1 Shareholder value is defined as total market capitalization adjusted for new equity issues.


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and action to increase shareholder value, particularly on mobilizing resources toachieve the required outcomes.

Economic Valued Added (EVA) is advanced as a more accurate assessment of

corporate operating performance, reflecting the success or otherwise of a company in

adding value to their shareholders investment. EVA is the residual income leftover from operating profits after the cost of capital has been subtracted (Stewart,

1994). Essentially, EVA measures the degree to which a firm is successful in earningrates of return that exceed its cost of capital. Protagonists of EVA see the mission of

the corporation not to maximize its market value, as economists like to say, but ratherits market value added (MVA); MVA being the difference between a companyscurrent value as determined by the stock price and its economic book value. EVA

is increasingly being used as a performance measurement tool to compensatemanagers. Yet, while EVA may identify areas of value destruction, perhaps with more

precision than either SVA or VBM, it still stuffers from the weakness that it does notidentify how the organization should mobilize resources to increase shareholder

added-value. In aiding decision-making, it implicitly assumes that the strategicoptions open to the organization have already been identified its key focus is onmeasurement.

Strategic perspectives

At a strategic level there are a variety of strategies open to organizations whichpurport to create shareholder value. Outside of organic growth, itself a legitimate

strategy, a wide-ranging literature suggests many prescriptions includingdiversification, mergers, acquisitions, demergers, alliances, joint ventures, and

extending the scope of the business through a process of globalization.

Yet a key issue with all of these strategies is their implementation. Even with amerger with synergies that look valuable in analysis, there is still the problem ofensuring that the human and organizational factors are motivated and resourced to

actually achieve the synergies (Lubatkin and Lane, 1996). Indeed, research highlightsthat results with mergers and acquisitions have been mixed. Acquisitions frequentlydestroy more value than they create (Grundy, 1996; Sirower, 1997); many alliancesnever get beyond their announcement (Ario and Doz, 2000); joint ventures often endup in the courts fighting over intellectual property rights; and financial market

sentiment is generally adverse to unrelated diversification (Amit and Livnat, 1988).Interestingly, the market generally reacts positively to demergers, as the incumbentmanagement have either not been able to achieve synergies or extract value from

resources, and it is somewhat ironic that the individual businesses are worth moreseparately than when within the same stable (Kirchmaier, 2001). Globalization itself

is more an aspiration than a strategy; a coherent strategy must be developed to affectthe globalization process and this strategy may include alliances, acquisitions and/or

joint ventures.


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Managerial action perspectives

Managers do engage in activity that they see as creating shareholder value;unfortunately it is often both misplaced and misguided. 2 Much of the focus of

management attention in many organizations is generally on cost cutting and on the

implementation of efficiency initiatives; boosting the bottom line rather than oncreating any real value or contributing to the value creation potential of the

organization. Indeed, what often masquerades as value creating activity is nothingmore than the unlocking the value already inherent in the organization - value which

has laid dormant because of management inaction. Such initiatives include timecompression management, downsizing, just-in-time, total quality management,process re-engineering, benchmarking, customer intimacy, and outsourcing.

The key focus of these initiatives is on improvement rather than value creation.Downsizing, for example, has become a euphemism for cost reduction, usually in the

form of head count reduction. One study reported that stock prices of downsizing

firms usually rise soon after the start of the cuts, but in the long run actually under-performed the market (Cascio, 1993). Downsized firms have also been shown toloose their innovative edge (Dougherty and Bowman, 1996) thus value is destroyed.In addition, managerial action initiatives tend to be fashion led and piecemeal, often

driven by mis-guided compensation schemes rewarding short-term results rather thaneffecting the actual process of creating value.

Resource-based perspectives

It is an almost hollow truism to state that what underpins value creation in an

organization is a clear vision that is supported by a sound strategy and, unless luckplays a part or the organization is in a monopoly situation, without either the deliveryof shareholder value will be elusive. What is equally crucial, however, is how the

organizations resources are mobilized behind this vision. Recently, within thestrategic management discipline, there has been considerable interest in focusing on

resources and their deployment in organizations, leading to the development of whatis called resource-based theory (RBT). Ironically, RBT emerged from research intodiversification. Wernerfelt (1984), often seen as the father of modern RBT, built on

economic theories to demonstrate that modeling the firm according to its resourcesleads to coherent diversification decisions by defining common non-financial links

(see also Chatterjee and Wernerfelt, 1991).

The basic premise of RBT is that what explains the value-creating capability of an

organization is not the dynamics of the industry within which the organizationcompetes (Rumelt, 1991) but the processes of resource accumulation and deployment

inherent in an organization that leads to idiosyncratic endowments of proprietaryresources (Barney, 1991; Collis and Montgomery, 1995; Dierickx and Cool, 1989;Petraf, 1993; Wernerfelt, 1984). Resources are portrayed as including structures,processes, people, culture, knowledge, and relationships. Resources that are valuable,

2 It is not the intention of this paper to engage in a debate regarding employee intentions; while the

assumption is that managers act in the best interests of shareholders, this may not always be the case.Agency Theory makes a distinction between owners and employees, arguing that incentives may needto be constructed to ensure appropriate behavior (Jensen and Meckling, 1976).


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rare, imperfectly imitable and imperfectly substitutable are an organizations mainsource of sustainable competitive advantage (Barney, 1991).

While offering insights into value creation, particularly the relationship between

resources and advantage, RBT still requires further development. Most writings are

conceptual in orientation, exhibiting a lack of clarity in terminology, and to date therehave been few empirical studies linked to the theory. Bowman and Ambrosini (2000)

argue that a more precise and rounded underpinning theory of value is required tohelp us identify valuable resources. Inanimate resources (all tangible and certain

intangible resources) are incapable of transforming themselves into anything otherthan what they are and therefore need to be activated, or worked on, before they cancontribute to the value creation of the firm. Even in the strategic management

literature it is recognized that there is an essential need for a more developedunderstanding ofresources in action (Black and Boal, 1994; Bowman and Ambrosini,

2000; Haanes and Fjeldstad, 2000; Majumdar, 1998) as it is through the process ofresource accumulation and integration that the organizations capability to create

value is cultivated (Amit and Schoemaker, 1992; Grant, 1996).

Resources ShareholderValue

Value creation processes

Resource-basedperspective:Recognizes therelationship between inputresources and value

Financial and economic perspectives:Value

of what has been created; value creationpotential of strategic optionsStrategic perspectives:How

resources have potential to createvalue

Managerial action perspectives:costreduction; improve efficiency andeffectiveness

Figure 1 The value creation process.

Using a simple input-process-output diagram to visually illustrate the link betweenresources and shareholder value, Figure 1 summarizes the central emphasis of these

four different perspectives in the creation of value. The strategic perspectives focus onthe value creating potential of certain structural changes or resource synergies, but donot provide managers with any guidance for assessing the practical implications of

implementation and thus the actual execution of strategies. The managerial actionperspectives concentrate on reducing cost or increasing the effectiveness of existing

resources rather than creating value per se, focusing on specific initiatives or discreteparts of the process in creating shareholder value. Financial and economicperspectives concentrate on measuring and assessing either the value created post

implementation or the potential value creating ability of decision options. To theextent that input resources are made up of IC components, these perspectives then

provide little information on the link between resource inputs and how they are

transformed into outputs. Resource-based perspectives examines the nature andquality of resources to be deployed in the value creation process, but do not provide a


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framework for understanding the process of deployment and how the resulting valueis created the relationship between input resources and output value is assumed, but

not explained.

In summary then, none of the perspectives discussed provide a holistic framework for

understanding how resource inputs are turned to outputs in the process of creatingvalue3, particularly in knowledge intensive firms. Consequently, these perspectives do

not provide managers with a practical framework for understanding the dynamics ofvalue creation in such firms, and thus do not provide sufficient guidelines for

designing and implementing knowledge-based strategies.

3. INTELLECTUAL CAPITAL PERSPECTIVE

The intellectual capital (IC) perspective and underpinning literature presents anattempt to address many of the shortcomings of other perspectives on value creation

highlighted above. This perspective emerged as a response to the frustration causedby traditional management approaches and their applicability to leverage intangibleresources. Having its roots firmly grounded in practice, the IC perspective places

greater emphasis on resources in action than RBT, focusing on the creation,deployment and harnessing of resources.

While the IC perspective was pioneered by Skandia, the Swedish financial servicescompany, and led by Leif Edvinsson, Director of Intellectual Capital, the concept

started to formalize in the early 1990s. 4 The work of Skandia was first presentedexternally in 1994 in a supplement to the annual shareholders report to describe thevalue of the companys IC to the investment community, as they felt this was not well

understood.5 Other companies around the world, including Dow Chemicals,Canadian Imperial Bank of Commerce, and Hughes Space and Communications

Company also started to use the IC perspective to address their specific problemsrelating to intangibles. Although these companies struggled with different issues theyall had the same principal reason for their interest in and adoption of the IC concept:the need for a new language and framework that would allow them to address theissues surrounding the true drivers of value creation in knowledge intensive firms.This issue is of course also highly relevant for high-tech companies such as AP iON,as [i]n todays highly competitive, technologically driven environment, the scarceresource that constrains the growth and strategic success of companies is not so

much capital as it is specialized knowledge and expertise and the organizationcapability that embeds it within the company (Bartlett and Ghoshal, 1993, p. 32).

3 Expressed as shareholder value in this paper.4 That is, the concept as used in this paper and as it has come to develop over recent years. The notionof intellectual capital were first advanced by economist John Kenneth Galbraith who wrote thefollowing to fellow economist Michal Kalecki in 1969: I wonder if you realize how much those of us

the world around have owed to the intellectual capital you have provided over these last decades (citedin Hudson, 1993, p.15).5 Skandia was by no means the first company to have introduced models for visualizing and reporting

on intangibles, nor were they the first to start to formulate a theoretical framework. Their work hashowever had a great impact on the business community and how the IC perspective subsequently

developed. The Skandia model was influenced by material from many different sources. Worthmentioning is the work of the Konrad group in Sweden in the late 80s who designed a template withkey indicators for knowledge intensive companies (Sveiby, 1989).


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The dominating financial view of the firm, on which most applied management

theories and tools are based, was not able to provide these companies with thecomplete perspective on how value is actually created. The accounting framework is

based on recording historical, transaction-based events. However, IC resources are

often internally generated and their development is rarely triggered by specifictransactions but is often continuous rather than discrete, affecting the value of the firm

long before explicit revenue or expense events justify an accounting record.Resources such as products in development and employees with unique technical

competence may have vital impact on both the current and future value of theorganization, but only show up as costs in the accounts in terms of investments madefor their development and maintenance. With this focus, the accounting framework

therefore provides little guidance in understanding and managing the firmsintellectual resources and their effect on value creation.

Although it emerged out of practice, the IC perspective has since been adopted and

developed by academics as a practical framework for describing all of the valuecreating resources a firm has at its disposal and a common perspective andterminology is now emerging based on case material and experiences from

practitioners (Bontis, 1996, 1998; Bontis et al. 1999; Pike et al. 2000; Roos et al.1997; Rylander et al. 2000).

At the outset there were as many definitions of IC as there were authors andpractitioners (Brooking, 1996; Edvinsson and Malone, 1997; Roos et al., 1997;Stewart 1997; Sveiby 1997). Recently we have seen not only a further developmentand refinement of the early concepts, but also a convergence of terminology. The ICliterature now tends to distinguish between three fundamentally different resources:

human capital (HC), comprising the competence, skills, and intellectual agility of theindividual employees; relationship capital (RC) which represents all the valuable

relationships with customers, suppliers and other relevant stakeholders; andorganizational capital (OC) including processes, systems and structures, brands,intellectual property and other intangibles that support value creation. Figure 2

illustrates the generic high-level IC framework or distinction tree. What resourcesactually make up these generic capital forms is unique to each and every organization,

as only those resources that are important for creating value should be included inconstructing the distinction tree for an organization (Bontis et al. 1999).6

6 An example of a detailed distinction tree can be found in Appendix A. Note that APiON used a

different classification where organizational and relationship capital are combined to make upstructural capital (SC). This was because of the importance in the process of the difference between the

resources pertaining to the individual employees (HC) and the resources pertaining to the organization(SC). This also corresponds to the first IC models (see early Skandia IC annual report supplements)where this distinction was made.


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Figure 2.Total value scheme the resource base of the organization.

Whereas some theoretical underpinnings of the IC literature draw on aspects of theresource-based perspectives, the practical applications and pragmatic approach of theearly IC practitioners provide a basis for practical managerial tools and

methodologies. Thus, the IC perspective offers a bridge between the conceptualthinking of RBT and a practical approach necessary for the adoption of concepts and

frameworks by managers. Furthermore, the IC perspective provides a framework forexplaining the value creation process in the link between resources and shareholdervalue illustrated in Figure 1. Many of the shortcomings of the other perspectives can

be addressed through the IC perspective as outlined in the points below.

The IC perspective provides a holistic viewof the firm.

A principal objective of the IC perspective is to create a framework that allows fordescribing all resources at the firms disposal and how they interact to create value.

As shown in Figure 1, these resources includes physical and financial resources aswell as intellectual resources7. Although the IC perspective grew out of the need forvisualizing and understanding the intangible aspects of the organization, the objective

is not to exclusively focus on these resources. Rather, it aspires to provide a morebalancedpicture of the firm, taking into account the intangible value drivers as wellas the traditional financial ones.

1. The I C per specti ve p rovides a basis for developing anunderstanding of t he nature of resources in act ion

Intellectual, or intangible, resources have different characteristics than physical andmonetary resources beyond tangibility. This affects their impact on the value creationprocess differently depending on the resource and the context. Any model aiming at

depicting how different resources with different characteristics impact the valuecreation process, must be able to incorporate these characteristics. Unfortunately,

there is currently only limited research in this area, consequently these differentcharacteristics and their effects are not fully understood. However, given our currentunderstanding, there are few key features of elementary importance that must be

recognized in any dynamic model.

7 The IC perspective uses the term capital to describe the 5 fundamentally different types ofresources. For the purpose of this paper we use the terms capital and resource interchangeably.

Monetarycapital

Physicalcapital

FinancialCapital

Organisationalcapital

Relationshipcapital

HumanCapital

IntellectualCapital

Total capital


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Many IC resources are non-rivalrous in an economic sense, meaning that they can beused simultaneously by many users in different locations at the same time. This

applies to, for example, a process, an information data base or a system i.e. mostelements of organizational capital. The non-rivalrous concept is also relevant for any

knowledge (HC) that has been formalized and transformed into information, for

example in the form of a manual (OC). This information can be used by an unlimitednumber of people, for a variety of applications, regardless of location, particularly if

stored in digital form, an objective of many corporate Intranets. A machine on theother hand, can only produce a limited output per unit of time and only in a single

location at any one time.

One of the fundamental economic laws upon which accounting relies is the law of

decreasing returns. When a machine is used, the capabilities of that machine areconsumed, thus the accounting rule of depreciation. This is not true of intellectual

capital. When knowledge is used, for example through formalizing it as a process orthrough knowledge exchange with another party, it does not decrease in value. On the

contrary, when articulated and challenged new knowledge is developed and thus itsvalue may very well increase. Indeed, it has been suggested that some of theintellectual resources are instead characterized by increasing returns (value generated

increases per incremental unit of investment). In reality most intangible resourcesapply to a combination of decreasing and increasing returns throughout their lifetime.For example the resource customer relationships (RC) often benefit initially from anincreasingly growing customer base as the individual customer benefits from theimproved service and learning effects this provides the supplier (increasing returns).However, after a certain level the network may become too large to handle with thesystems and processes in place and each customer experiences a negative impact onthe service provided as a consequence (decreasing returns). The challenge lies in

determining when the changes of the curve will occur, i.e. when the increasing returnsturn to decreasing returns (Arthur, 1990, 1996).

As intellectual resources are often internally generated, interrelated andinterdependent their value is context specific (Collis, 1994). The value of a brand, for

example, is heavily related to the particularities of the industry in which they aremarketed. This predicament has become apparent in the many discussions and

experiments around brand extension that have captured the interest of many firms inrecent years. Research has also shown that these effects are appreciated by financialmarkets. In a study of over 1,000 firms by Brynjolfsson and Yang (1997), an increase

of one dollar in the quantity of computer capital (tangible asset base) installed by afirm was found to be associated with an increase of up to ten dollars in the financial

markets valuation of the firm. The researchers model suggests that intangible assetscan provide an explanation for this high market valuation because they complementinformation technology just as software complements hardware. To realize the

potential benefits of computerization additional investments in human, organizationaland relationship capital (IC) may be needed (for example in the form of training and

new processes to support the new IT system). The conclusion of the study is that thecontribution of computers to a firms market value is increased only when they arecombined with certain intangible assets especially created to support the investment in

hardware (see also Powell and Dent-Micallef, 1997).


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Furthermore, unlike balance sheet items, the value of the constituent parts of IC is notadditive. Because these resources are co-dependent in creating value, and because the

resulting returns may well be increasing rather than decreasing, it becomesmeaningless to attempt to assess the value of the constituent parts of IC by adding

them together. Although parts of the structural capital can be traded, for example

certain brands8

, it is only through combination and utilization that most intellectualresources render any value to an organization.

The IC perspective is able to incorporate these characteristics in the holistic

framework used to study the resources in action and their contribution to the firmsvalue creation through the concept of transformations9. As already noted, there is nocorrelation between the presence of resources and the ability to create value. Value is

created (or destroyed) when one resource is transformed into another. For example,monetary value can be created through selling a process (organizational resources

transformed into monetary resource) or new organizational capital can be createdthrough formalizing knowledge into a process (human resources transformed into

organizational resources). The impact of the transformations on value created can beassessed and visualized with a Navigator, a model revealing all the value creatingresources (tangible and intangible), their transformations and the relative importance

of the resources and transformations for value creation. The Navigator will be furtherexplained and illustrated later in the paper.

2. The IC perspective provides a common language aroundintangibl es, facilitating the understanding of their contribution to

value creation within and between firms as well as to

shareholders and other stakeholders.

The IC perspective is already becoming widely understood and applied, both inacademia and within the business community. Although there are still many differentdefinitions and versions of this perspective and what it consists of, a consensus hasbegun to take form regarding concepts, tools and frameworks.

The IC perspective focuses on value, not on cost.

The IC perspective takes the potential for value creation of a resource or a

transformation as point of departure, regardless of its origin, thus complementing theaccounting framework. While the latter provides an excellent basis for studying thecosts relating to historic and future transactions, the former allows you to look at

sources of value and their path to finally becoming realized in financial terms,regardless of the origin of those sources.

8 Note however that the value of a certain brand may very well differ from firm to firm depending on

the other brands possessed by the firm, the experience and knowledge of the marketing people, etc.9 In the early versions of theory building around IC this was referred to as flows (Roos and Roos,1997).


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3. The IC perspective is practicalrather than conceptual.

The IC perspective and its supporting concepts, tools and frameworks have beendeveloped in an iterative process between the practitioner and academic communities,

drawing heavily upon a practice oriented research approach. 10 This has allowed the IC

perspective to be highly practical and actionable from a managerial perspective as willbe illustrated with the case about AP iON.

4. THE IC PROCESS

The IC perspective utilizes concepts, tools and frameworks to help organizations

harness its IC. As it focuses solely on value, it provides managers with a complementto the accounting-based tools and techniques with their emphasis on cost. The ICprocess operationalizes the perspective, and is designed around the features outlinedin the previous section in order to help the company create a holistic picture of howvalue is created within the firm11. Illustrated in Figure 3, the first two phases establish

the framework and conditions for the value creation process as they define what valueis to be created and the organizations strategic intent. The two remaining phases, and

the central focus of this paper, then uses the IC perspective to outline the principlesfor how that value is to be achieved or in other words, what the organizations valuecreation path looks like.

Operationalize value creation

This first step entails defining who the stakeholders are and what value they want the

organization to create for them. For a government department, for example, this canbe a very complicated process as there is a large set of stakeholders involved that allhave different, and often conflicting, objectives and needs most of them non-

financial. Because the definition of what value to be created is where the rest of theprocess is focused upon, this is a crucial step for this type of organization. 12 At the

other extreme we find AP iON, where the value dimensions of the stakeholders arevery clear. The directive from the shareholders the primary stakeholder - was todevelop and implement a strategy that would allow AP iON to maximize the value

they would get from an IPO in 4 5 years time.

10 From an ontological and epistemological perspective the concepts, tools and models have emergedfrom research conducted under the participatory research paradigm. Participatory inquiry is acollaborative, experiential, reflexive and action-oriented process. For further information on this

paradigm see Breu and Peppard (2001), Park (1999), and Heron (1996).11 This process is part of a more extended process where the final outcome is an IC index, a tool thattracks the organizations performance in creating value for its stakeholders, based on how well its

critical resources (physical and financial as well as intellectual) are developed, maintained anddeployed in the process. Because it takes a strategic, holistic and forward looking view of the firm itprovides management with a leading indicator of financial value creation. However, the measurement

and operational aspects of this process are beyond the scope of this paper and have therefore beenexcluded. For a description of the full process and the resulting performance measurement tool, see

Rylander and Rbsamen (1999).12 For a case on how to apply the IC process to a situation with a complex set of stakeholders see Roosand Jacobsen (1999).


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Operationalize

value creation

Visualize in

navigator

Articulate

value

creation path

Outline

strategic

Intent

Performance measurement

Figure 3. Overview ofIC Process.

Outline strategic intent

The strategic intent represents the strategic position the firm aspires to, relative to the

competitors.13 This is normally expressed in terms of perceived value by customersand delivered cost. The objective of this step is to ensure that the organisation has aclear direction which to strive towards, one which is understood by all participants in

the IC process. As the Navigator will define what is required by the organisation toachieve the strategic intent, there has to be a coherent view of where the organisationis going or the Navigator will be ambiguous and not provide any insights or direction

for management (other than the fact that the strategy and how to achieve it is unclear).

Articulate value creation path and visualise navigator

A value creation path, within the context of the IC Process, is the description of themanagement teams understanding of how the organization creates value whatresources they use, how they are deployed (i.e., transformed into another resource),

the relative importance of these resources and transformations, and how they arerelated to each other in the creation of value. The Navigator is the visual

representation of the value creation path and includes all value creating resources human, organizational and relationship resources as well as the physical and monetaryresources that are traditionally included in the balance sheet thus providing a

holistic picture of the organizations value creation process.

Successful, experienced managers have an unarticulated, implicit model in their mindof how success is achieved in their business (Mason and Mitroff, 1991). This mentalmodel directs their actions and decisions, particularly in a situation when there is not

enough time to go through a rational analytical process they act based onexperience. However, different managers have different experiences, knowledge and

competencies and consequently act according to different mental models. In addition and especially when working in an emerging industry and with a rapidly growingcompany such as APiON there is rarely a common definition and understanding ofthe terminology relating to the intellectual resources and their components. Theprimary aim of the IC process is to uncover these implicit mental models and to arrive

13 The notion of strategic intent was first introduces by Hofer and Schendel in 1978 and furtherdeveloped by Hamel and Prahalad in 1989.


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at a common model of how the firm ought to work to achieve the strategic intent (i.e.what resources to grow and how to deploy them).14

5. AP iON

Phone.com to buy APiON for $263m ran the headline in the Financial Times on21st October 1999, thus ending the remarkable rise and development of a smalltelecommunications software house into a major league player over a period of less

that 3 years. Incredibly, Phone.com15 had only purchased half the company for thisprice; specifically the human, organizational and relationship capital that enabled it to

develop products which allowed the Internet to be browsed from a mobile phone. Theremaining service business, the traditional core of AP iON, still remains today andtrades under the name of AePONA.

Based in Belfast, Northern Ireland, AP iON Ltd was formed in mid-1995 as a

subsidiary of Aldiscon limited, a Dublin-based Software company, to function as aproject house for Aldiscon and Ericsson for joint development work. In 1997 Logicabought Aldiscon and APiON was spun off as a separate company. When Denis

Murphy took over as CEO in July 1996, APiON had 20 staff, mainly involved indeveloping switching software. With the purchase of Aldiscon Murphy was presented

with an explicit objective: maximize shareholder value.

Murphy and his senior management team immediately sought to move the company

away from a business model that depended solely on service revenue to a companyderiving a substantial part of its revenues from license fees, not least because of thehigher valuations attached to product companies. The expression of the strategic

intent to achieve the highest possible growth in shareholder value was to be a world-leading niche telecommunications software company by successfully utilizing leading

edge technology in the commercial exploitation of first to market computer basednetwork infrastructure components.

From the early days the Board and senior management team decided to focus onproviding solutions and products in the network infrastructure marketplace. A corebelief of Murphys was that while the company did not know what the products orservices of the future would be they could establish with a degree of accuracy thetechnologies upon which they would be based. Together with his top management

team, he identified the knowledge and skills together with core technologies whichwould underpin the competencies required to compete in this marketplace (see Figure4). These infrastructure technologies were primarily switching, signaling, wirelessdata, Internet integration and convergence with telecommunications, billing, networkmanagement and intelligent networking technologies.

Yet right from the beginning Murphy faced a predicament. While he had a firm belief

that software companies and not traditional telecommunications companies would be

14 It also provides the structure for the measurement system upon which the IC index is subsequentlybased as it reveals what resources and transformations are essential and thus what needs to be

measured.15 Since November 20, 2000 Phone.com has been renamed Openwave (NASDAQ: OPWV) after itsmerger with Software.com.


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the key players in the telecommunications industry in the next century, he faced thechallenge that the necessary knowledge and skills underpinning these competencies

were not in great supply, and sourcing them would be particularly difficult inNorthern Ireland. He therefore put in place a strategy to build the required

competencies, a central feature was the acquisition and development of knowledge

and skills. The aim was to bridge the knowledge gap between what was knownwithin the company and what was required to be known in as short a time-scale as

possible. The company set about acquiring and developing knowledge and expertisein the range of network infrastructure technologies identified.

Core competencies Knowledge gap

Core products

Dont know what products will be but knowthe technologies upon which they will be

based

Core skills and technologies

Based around

industrystandards

Alliances Personal

developmente.g. SS7 skills

from project withEricsson

SMS project for Japanese market

Switching

Signaling and IN

Wireless data Internet integration/ convergence

Billing and network management

Figure 4 The knowledge gap.

Murphy points to three early initiatives that helped to build the foundation for this

knowledge and skill base. The first was to increase knowledge about switching callson digital networks, and they accomplished this by working on a project jointly withEricsson. With the second initiative, engineers were dispatched to Dublin to work ona project to develop content sensitive knowledge in the product area of short

messaging, i.e. sending short messages from mobile phone handsets using the mobiletelephony network. This project involved making modifications for the SMSC (Short

Messaging Service Center) for the Japanese market. The third initiative centered onacquiring knowledge in signaling protocols, particularly SS7 (Signaling System 7),the technology that enables a computer to communicate with a telephone network,

through working on a joint development project with Siemens.

While the company generated revenue from these activities, this was not the primeobjective. Murphy had a longer-term vision of creating this knowledge platform forfuture products. Indeed, the company only entered into new contracts for work wherethe subsequent projects would result in employees gaining new knowledge andexperience, thus fitting in with this development plan. In addition to these initiatives,the company also set itself the task of creating what Murphy referred to as a trulylearning organization and to this end the company put in place a number of in-houseknowledge-creating and exploitation initiatives.

Central was a strategy to aggressively develop people both through training andstrategic rotation of staff between both technologies and different types of projects.An internal management development program focusing on such aspects as project


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management, developing leadership skills, handling conflict and managing teams wasalso instigated. A specialized Masters program in telecommunications was developed

in association with University of London. This modular program was taught on-siteand had the central emphasis of adding intellectual rigor to the knowledge acquisition

process.

New recruits were required to embark on an eight-week induction program when they

joined the company. Human resources manager Elaine Dickson explained thatbecause telecoms switching was such a specialized area and so important to AP iONs

development, each new recruit had to go through the initial intensive inductioncourse. This is followed by a further four-to-six weeks of advanced training whichmay involve onsite project work in other countries or indeed flying people in to

provide training for our new recruits in Belfast.

The company also adopted the UK Governments Investors in People initiative toguide the personal development of staff. Training is but one aspect of this initiative as

it also entails aligning employee development with company strategy. A central pillaris employee understanding of the companys strategy and to this end regular strategyworkshops were run for all employees, including administrative staff. These typically

lasted for 3 hours and group sizes ranged from 12-15. Traditional performancereviews were replaced with development reviews which focused on whatemployees sought to achieve with their careers in order to identify their personaldevelopment needs. To advance up the companys pay scale it was not necessary tomove into managerial roles; career development in AP iON ensured that employeescould stay at the cutting edge development work without having to move intomanagement roles yet be rewarded for their contribution an early lesson was that thebest developers dont automatically make the best managers.

A Technology Forum within the company was also established and all employees

were expected to participate in its activities. This Forum had one permanent member,and employees rotated membership, spending up to three months working onincreasing their industry and specific knowledge before going back into the business.

When a member of the Forum, individuals allocated 20% of their time to research anddevelopment (R&D) type activity so that they had the necessary bandwidth to

identify opportunities. The primary agenda of the Forum was to get early visibility ofpossible product opportunities.

The company was also an early member of the Wireless Application Protocol (WAP)Forum, joining in March 1998. The objective of this membership was to gain

knowledge early regarding the status of standards as well as actively influencestandards development. The WAP Forum was established in 1997 with the aim ofdefining an industry wide standard for delivering applications over wireless

communications networks. WAP defines a set of protocols to enable operators,manufactures and applications providers to meet the challenges in advanced wireless

service differentiation and flexible service creation.

Murphy was also keen to establish an organizational climate conducive to the

developments he was attempting to achieve. He tried to ensure an informal

atmosphere remained even as the company grew, there was an open door policy andall employees were actively encouraged to contribute and make suggestions. As an


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admirer of the success of the many Silicon Valley startups, Murphy promoted regularsocial events, including the Friday night pizza and beer busts.

However Murphy was uneasy with this range of activity. Not that he believed them to

be inappropriate but because they were based on gut feel rather than a tried and

trusted formula. He was also was frustrated with the traditional strategy process andmodel as well as their management information and reporting systems, as he found

them inadequate for supporting him in developing and implementing a strategy soheavily dependent on building and leveraging knowledge. Without a structured

framework for describing the strategy or even a common language within theorganization for communicating the strategy it was difficult to action. Theknowledge building initiatives were bearing fruit in creating stocks of knowledge,

however explicitly mobilizing this knowledge to create value was proving somewhatproblematic. Having been exposed to the concept of IC he believed that it offered a

perspective that might be appropriate for his business. For Murphy, the IC frameworkprovided a complementary perspective on strategy, and its strong focus on action and

implementation was appealing. In early 1998 he decided to take his managementteam through an IC process.

Articulating the value creation path and visualiz ing the navigator

During a series of workshops the management team worked through the implicationsof their strategic intent in terms of prioritizing their investments and businessactivities. Armed with a new language containing words such as resources,

transformations, human capital, and structural capital they set about exploringwhat the optimal value creation path should look like for APiON, given its strategic

intent.

In particular, the senior management team worked on answering the following threequestions:

1. What resources do we need to create value according to the strategic intent?

The first task is to identify all the necessary resource inputs to the value creationprocess. Thus in response to this question all resources - intellectual as well asphysical and monetary - necessary to create shareholder value are identified, agreed

upon and visualized in the form of a context specific distinction tree (see example inappendix A). Given the knowledge-based strategy of the company, the focus was onidentifying the different components of IC both existing and non-existing but

necessary. Because of the intangible and thus inherently ambiguous nature of thoseresources this is not as obvious as it may seem. The APiON team spent much time

addressing this question to ensure they all had the same understanding of valuecreating resources.

2. How should we best deploy these resources to create value according to the

strategic intent?

In addressing this question, workshop sessions sought clarity in defining how theidentified resources could most effectively be deployed. Or, using the language of the


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IC perspective, the participants defined the value creating transformations of thepreviously defined resources. This involved posing themselves questions like:

In order to achieve the strategic intent, in what resources should we invest our

money?

How do we ensure that knowledge is created in an efficient manner? What is most effective in terms of value creation? For example, should the

company use its engineers knowledge to sell man-hours? Or use this knowledge

and competence to develop new solutions? Or use engineers to train newcolleagues?

What do these transformations mean in operational terms?

3. How relatively important are the identified resources and transformations for

achieving the strategic intent?

Through assigning weights to the resources and transformations the team was forcedto think in terms of trade-offs, to identify what resources and transformations arereally important for achieving the strategic intent and how they relate to each other in

the process of creating value for the shareholders.

It was relatively easy to accept that all suggested resources were good to have and thatit would be helpful to deploy them in all sorts of ways. This question is, however,more challenging prioritizing between the resources and transformations. If you

cannot focus on everything, what resources should be let go? What resources aremost crucial to the value creation process? At this stage the different points of view

within the team became more apparent and the most valuable insights came out of

these discussions.

This visualization process generates large amounts of information about hidden assetsdeemed important by the participants. To avoid a paralyzing information overload and

be able to act upon the new insights, the trade-offs necessary for maximumshareholder value creation have to be determined to keep the strategic focus clear.

Articulating the value creation path is an iterative process where consensus within thegroup is achieved through discussion and argumentation. The finally agreed answers

to these three questions are summarized and visualized in the AP iON Navigator (seeFigure 5).

The boxes in the Navigator represent the four forms of capital and the arrowsrepresent the transformations between them. The size of the boxes and arrows showtheir relative importance to value creation; the larger a box or an arrow the larger itsimportance. However, the small size of the monetary capital does not mean that thecompany does not wish to generate revenues, but that money is less important thanthe other capital forms in the process of creating value for the shareholders. It is morecrucial to have the right knowledge, processes and systems, and to leverage thatknowledge and those systems to create new products.


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PhysicalPhysical

CapitalCapital

HumanHuman

CapitalCapital

MonetaryMonetary

CapitalCapital

StructuralStructural

CapitalCapital

a

c

b

d

e

f

f

f

Figure 5 The APiON Navigator

The most important transformation is from structural capital to physical capital (arrow

a in Figure 5). For AP iON, physical capital represents products as the company doesnot have any physical assets of importance for value creation (for example, computer

equipment is leased and premises are rented). That arrow thus represents thetransformation of structural resources (such as processes, procedures, manuals, anddatabases - including the knowledge embedded within them) and relationships with

customers and strategic partners into products. This is quite straightforward given thestrategic intent, which in practice translates into the objective of becoming a product

company. Nor is it very surprising that the second largest arrow is from physicalcapital to monetary capital (arrow d in Figure 5) a transformation commonlyreferred to as sales.

There are two more transformations of high importance; the one from structural

capital to monetary capital, revealing that the company still planned to generate somerevenues from customized solutions (arrow c in Figure 5). The second transformationis that from human to structural capital the only outgoing flow from human capital

(arrow a in Figure 5). This indicates that there will be no direct sale of importance ofpure man-hours (such as consulting) and that all product development will be donethrough structural capital (primarily through processes). The arrow from structural

capital to human capital signifies that working in projects and through the variety ofknowledge creating initiatives individuals increase their own stocks of knowledge

(arrow e in Figure 5). The outgoing arrows from monetary capital representinvestments in the respective capital forms (arrows f in Figure 5).

Insights from the process

One of the key benefits of going through the IC process for the company was thecommon language that developed around intellectual capital and the shared

understanding of the key drivers of value and the value creation process within the

management team. This allowed for more effective communication surrounding the


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strategy and its implementation, within the team as well as to the rest of theorganization.

The discussions during the workshops also led to several aha-experiences within the

team. But there were two insights in particular that were so powerful that they came to

modify the focus and implementation of the strategy.

The first was the crucial importance of structural capital. As Murphy noted "When[we begun this IC process] we said that people are our most important resource. But

as we went through the analyses process we saw something quite different that caused

us to think quite differently about what to do in order to create shareholder value.

The fundamental philosophy of building knowledge and competence as aggressivelyas possible did not change it was still seen as the key to achieving the strategic

intent. But rather than focusing on building the knowledge of the different individuals(human capital), the company changed the focus to putting mechanisms in place to

extract the experience and tacit knowledge of the employees and turn it into structuralcapital. In this way they can leverage the knowledge of the individuals: people canlearn from others experiences, they can pick up a project where somebody else has

left it, and new employees can get up to speed more rapidly. It also reduces the risk ofpeople leaving and taking their valuable knowledge with them.

The understanding of the role that structural capital could play in the AP iON valuecreation process also helped the company identify other structural capital valuedrivers they had not previously considered. For example, the AP iON brand, whichhad largely been ignored, but which the company now realized required focus.

The second influential insight for the team wasthe understanding of transformationsbetween resources and the realization that they are the key to value creation.

It is not primarily the stocks of knowledge residing among the individuals in theorganization that would achieve superior shareholder value growth for AP iON, but

how they as an organization were able to transform that knowledge into a process, aproduct, good reputation, a brand or something else that creates the value a value

that will directly or subsequently be translated into financial returns for theshareholders. This insight led them to shift the focus from the mere building of theresource base, i.e. knowledge surrounding networking infrastructure technologies, to a

focus on the deployment of resources.

Acting on the insights

These insights drove AP iON to become a process driven, learning organization. Inpractice, this entailed establishing processes not only for supporting the engineers increating new knowledge, but also in enshrining knowledge within processes,

structures and systems. Although the company had instigated initiatives in order tobridge the previously defined competence gap, the Navigator helped the senior

management team focus, co-ordinate and integrate the these initiatives into a

streamlined value-creation process to ensure a conscious building of critical parts of


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structural capital and the key transformations (human to structural capital, andstructural to physical capital/products).

Figure 6 illustrates schematically the conversion of the skills and knowledge of

employees into organizational competencies. A key aspect of this transformation was

the definition of employee roles - roles themselves are imbedded in organizationalprocesses, with competencies manifesting themselves through these processes. Role

definition also incorporate the expected behaviors attached to a job position. Within,the company employees were likely to perform a variety of roles within a number of

different processes, sometimes even at the same time. For example, an engineermight be involved in the innovation process as part of his membership of theTechnology Forum while at the same time be involved in putting together a bid for

project work. As this figure also illustrates, processes and roles are bound byorganizational structure.

Knowledge

Roles

OrganizationalCompetence

Skills Behavior

StructureProcesses

The APiON Way

Human Capital

Structural Capital

Figure 6 Harnessing the intellectual capital at APiON.

The APiON Way represents the unique culture that existed at AP iON, which thecompany continually fostered, that shaped the behaviors of people. This is akin to thenotion of Ba as defined by Nonaka et al., (2000) as it represented the shared contextfor knowledge creation and application that existed with the company.

Realizing shareholder value

Through identifying what turned out to be the right knowledge and skills, acquiringand harnessing them through its structural capital, AP iON achieved its goal of first-to-

market in the convergent space. They were the first company in the world to-marketwith a WAP gateway product in February 1999 ahead of the market leading giantsEricsson, Nokia, Motoroal, and Unwired Planet (subsequently renamed Phone.com).16In September 1999 Finish telecommunications operator Sonera used their software inthe worlds first commercial WAP service.

16 From The Irish Times, April 9, 1999, Apion leaves Nokia in the dust to secure WAP technologydeal.


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Being first-to-market with their product allowed APiON to establish a lead in the

European market place. Phone.com were first movers in US and Japan and haddominant market share in these regions with their technology. There was thus little

overlap between the markets covered by the two companies and APiON was therefore

an attractive candidate for the much larger Phone.com who approached AP iON with a$263 million bid in October 1999.

The shareholders were faced with the choice of accepting the offer from Phone.com

or investing additional funds so that AP iON could pursue the market opportunityitself and follow the initial strategy to IPO 2 3 years later. The shareholdersunderstood that the question of timing was extremely important; in 2 3 years time

the WAP market would have matured and be more competitive and thus lessattractive from an investment perspective. The board accepted the bid.

6. CONCLUSION

Ghoshal et al. (1999) have noted that [m]anagers need to define their companies as

value creators rather than as value appropriators (p. 9). In this paper we haveillustrated how the management of telecommunications software company AP iON

saw themselves as value creators and focused on creating shareholder value andemphasized the creation of value in all their activities through embracing an ICperspective.

A focus on value creation implies that decisions and actions are judged in the contextof how much value they will create for the business. At the outset of this paper we

illustrated that conventional perspectives on value creation may help in assessing thevalue creation potential or in measuring the actual value created, they fall short on

implementation. Even resource-based theory, currently in vogue in the strategicmanagement discipline, has an underdeveloped understanding of resources in action.The development of the IC perspective, with its roots in practice, places greateremphasis on resources in action, focusing on the creation, implementation anddeployment of resources with a distinct focus on creating shareholder value.

Using the IC perspective it was possible for AP iONs management to formulate andimplement a strategy that could capture the full value creating potential of their

intellectual capital resources, which in turn allowed them to be deployed moreeffectively. At the heart of this strategy was the shift from focusing on merelybuilding human capital to redirecting those efforts so that it could be turned intodifferent forms of structural capital allowing them to leverage or indeed multiply thevalue of the knowledge and competencies of employees.

Too often today we hear about the battle for talent, but hiring the best is not enough.

Their knowledge and skill must be harnessed organizations must focus on winningthe war and this entails creating the engine for growth. The IC process, detailedin this paper, was perceived as crucial by AP iONs management team as both the

process followed and the outcome (the Navigator) helped create a common language

and understanding not only of the different intangible resources and their deployment,but also of the value creation process as a whole in a holistic and actionable way.


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APPENDIX A: The AP iON distinction tree

Customers26%

PotentialEmployees

12%

Owners7%

StrategicPartners

16%

Funders7%

Board9%

FinancialBodies

6%

Community6%

Suppliers5%

Distributors5%

Relationship Capital35%

Business Processes[steps]18%

Business Systems[facilitation tools]

6%

Business Structures6%

Image10%

Brands8%

Intellectual Property13%

Core Competencies28%

Culture11%

OrganisationalCapital65%

Knowledge Tower[core competence]

related 66%

Knowledge WallRelated

23%

Other11%

Competence37%

ConsistentlyHigh Motivation

46%

Traits29%

Behaviour25%

Attitude24%

Innovative35%

Imitative24%

ProblemFormulation20%

ProblemSolving

21%

Intellectual Agility27%

Sharing of contactswith many

45%

Sharing of contactswith one

29%

Informing of contacts26%

Personal Relationships12%

Structural Capital72%

Human Capital28%

Intellectual Capital63%

Emj Apion Case Study

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