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measurement of intellectual capital

measurement of intellectual capital
1-Proper reference
2-Summary of the paper which include:
A) What the argument is?
B) What the methodology is?
C) Why is it useful for me?
Department of Management, University of the Marche, Ancona, Italy 377
Abstract
Purpose – The aim of this study is to reflect on how the specific nature of intellectual capital
influences the valuation process, in practice, and how it impacts on some of the qualities of its Value.
Design/methodology/approach – This study is based on a case study (“Ankon”) developed by
adopting a modest interventionist approach.
Findings – This study highlights the relevance of the intellectual capital valuation process in spite of
the intellectual capital value per se. In fact, while intellectual capital Value seems to present a limited
level of objectivity, consistency, comparability and understandability, its valuation process can be
considered an opportunity to visualise and understand intellectual capital and its influence on
financial performance. In other words, intellectual capital valuation can be considered as a practice
useful to crave the attention of the managers on intellectual capital in action.
Research limitations/implications – The main limitations of this study are related to the
particular research methodology adopted (action research case study) and to the size of the case
investigated.
Practical implications – The findings provided by this research should be useful to those interested
in studying intellectual capital in action and in developing new valuation models or refining existing
models. Finally, considering that some of the limitations of intellectual capital value can be related to
the
absence of generally accepted valuation guidelines (e.g. the absence of a common definition, a single
process, etc.), this can represent an incentive for policy makers to draw up useful rules to make
intellectual capital value more understandable for an outsider and to identify managerial best practices.
Originality/value – In comparison with previous studies on intellectual capital valuation, this one
focuses on an in viva intellectual capital valuation process. In addition, this research stresses the
specificities and criticalities that emerge from a process perspective in which intellectual capital is
considered as a conventional object. Moreover, this paper enriches the previous critical discussions on
intellectual capital measurement focusing on intellectual capital financial value.
Keywords Intellectual capital, Intangible assets, Valuations, Accounting, Measurement,
Accounting valuation, Financial performance
Paper type Case study
1. Introduction
Some would argue that intangibles constitute an ongoing challenge for accountants
(Roslender and Fincham, 2001). In this context, some have shifted their attention from
single intangibles, such as brand, human resources, patents, etc., to a system of
intangibles called “intellectual capital” (IC). This has had an impact also on valuation S
practices. While the valuation of single intangibles can refer to some national or Emerald
international accounting principles and to several well known and applied valuation
models (e.g. brand equity, human resource costing and accounting, etc.), the valuation
of IC is still problematic, probably because of the specific nature of IC (Grojer, 2001; Journal
Mouritsen, 2006) or for lack of in-depth studies useful to achieving a deeper “ pp..3’I7-391
understanding of the IC concept, methods and tools (Andriessen, 2004; Kaufmann and © Enmld Gr
°“PP“b1iShi“f4‘5g3ig§g
Schneider, 2004; Seetharaman et at, 2002). DOI10.1108/14691931111154698
The current issue and full text archive of this journal is available at www.emeraldinsight.com/1469-
1930.htm
Construction and valuation of intellectual capital: a case study
Marco Giuliani and Stefano Marasca
Department of Management, University of the Marche, Ancona, Italy
Abstract
Purpose – The aim of this study is to re?ect on how the speci?c nature of intellectual capital in?uences
the valuation process, in practice, and how it impacts on some of the qualities of its value.
Design/methodology/approach – This study is based on a case study (“Ankon”) developed by adopting a
modest interventionist approach. Findings – This study highlights the relevance of the intellectual
capital valuation process in spite of the intellectual capital value per se. In fact, while intellectual
capital value seems to present a limited level of objectivity, consistency, comparability and
understandability, its valuation process can be considered an opportunity to visualise and understand
intellectual capital and its in?uence on ?nancial performance. In other words, intellectual capital
valuation can be considered as a practice useful to crave the attention of the managers on intellectual
capital in action. Research limitations/implications – The main limitations of this study are related to
the particular research methodology adopted (action research case study) and to the size of the case
investigated. Practical implications – The ?ndings provided by this research should be useful to those
interested in studying intellectual capital in action and in developing new valuation models or re?ning
existing models. Finally, considering that some of the limitations of intellectual capital value can be
related to the absence of generally accepted valuation guidelines (e.g. the absence of a common de?
nition, a single process, etc.), this can represent an incentive for policy makers to draw up useful rules to
make intellectual capital value more understandable for an outsider and to identify managerial best
practices. Originality/value – In comparison with previous studies on intellectual capital valuation, this
one focuses on an in vivo intellectual capital valuation process. In addition, this research stresses the
speci?cities and criticalities that emerge from a process perspective in which intellectual capital is
considered as a conventional object. Moreover, this paper enriches the previous critical discussions on
intellectual capital measurement focusing on intellectual capital ?nancial value. Keywords Intellectual
capital, Intangible assets, Valuations, Accounting, Measurement, Accounting valuation, Financial
performance Paper type Case study
Construction and valuation of IC
377
1. Introduction Some would argue that intangibles constitute an ongoing challenge for accountants
(Roslender and Fincham, 2001). In this context, some have shifted their attention from single intangibles,
such as brand, human resources, patents, etc., to a system of intangibles called “intellectual capital”
(IC). This has had an impact also on valuation practices. While the valuation of single intangibles can refer
to some national or international accounting principles and to several well known and applied valuation
models (e.g. brand equity, human resource costing and accounting, etc.), the valuation ¨ jer, 2001; of IC
is still problematic, probably because of the speci?c nature of IC (Gro Mouritsen, 2006) or for lack of in-
depth studies useful to achieving a deeper understanding of the IC concept, methods and tools
(Andriessen, 2004; Kaufmann and Schneider, 2004; Seetharaman et al., 2002).
Journal of Intellectual Capital Vol. 12 No. 3, 2011 pp. 377-391 q Emerald Group Publishing Limited 1469-
1930 DOI 10.1108/14691931111154698
JIC 12,3
378
In light of these considerations and approaching IC as a “conventional object” (Ijiri, 1967), i.e. an
accounting object to construct, the aim of this study is to re?ect on how the speci?c nature of IC in?
uences the valuation process, in practice, and how it impacts on some of the qualities of its value. To
investigate this idea, the Ankon case study was examined. In comparison to previous studies on IC
valuation, this one focuses on an in vivo IC valuation process and not on reviewing, commenting or
proposing theoretical models (Seetharaman et al., 2002; Sveiby, 2004; Tayles et al., 2002). In addition,
this research stresses the speci?cities and criticalities that emerge from a process perspective and does
not analyze the pros and cons of single methods (Andriessen, 2004; Bose and Thomas, 2007). Moreover,
this paper enriches the previous critical discussions on IC measurement (Dumay, 2009) focusing on IC ?
nancial value. Finally, the authors are not acquainted with other studies that approach IC as a
conventional object in order to analyse its ?nancial value. The structure of the study is outlined as
follows. The next section proposes a brief review of the prior knowledge of the basic elements of the
study, followed by a description and in-depth analysis of the valuation process carried out in the case
study. In the central part, an attempt will be made to make sense out of the case ?ndings and to
develop the theoretical arguments of the study. Finally, some valuable insights are extracted and
systematised to draw some conclusions and to propose future research opportunities. 2. Intellectual
capital valuation and the qualities of accounting measures 2.1 On the nature of IC as a valuation object
According to Penman (2007) the ?rst step of any valuation is the de?nition of the object to be valued.
Hence, the ?rst step in valuing IC is to de?ne it or, better, to draw its boundaries. Boundaries, in fact, are
essential in order to distinguish a part from the whole and consequently, to determine its value apart
from the value of the company. At the same time, boundaries can be considered binding structures, i.e.
items that produce and reproduce the internal unity of an entity (Llewellyn, 1994). While the boundaries
of a building or of a machine are clearly identi?able, the ones relative to IC are blurry (Gowthorpe, 2009).
In this study the term “de?nition” will be used to make reference to the choice of the theoretical de?
nition adopted, while the term “identi?cation” will be used to describe the drawing of the IC boundaries.
IC can be de?ned in different ways (see, for example, Edvinsson and Malone, 1997; Meritum, 2002;
Mouritsen et al., 2001b; Stewart, 1997; Sveiby, 2004). These de?nitions differ from one another in some
ways but they do not disqualify one another because most of them highlight the same characteristics.
First, IC is something invisible. Second, it is closely related to knowledge. Third, it offers better
opportunities for an organisation to succeed in the future. According to these properties, not all
organisational knowledge is IC, rather it is just that knowledge which is useful for the company to create
value. After the de?nition of IC, the identi?cation of the boundaries of IC also has to be faced. In
particular, previous studies have shown that, when observing reality, boundaries are not clear, and thus
identifying, classifying and measuring IC becomes dif?cult, especially if IC is “at work” and where,
inevitably, the interactions between resources have to be ¨ nnstro ¨ m et al., 2009; Cuganesan, 2005;
Mouritsen, 2006). Finally, the IC considered (Bra resources (knowledge) that have to be considered inside
the concept of IC cannot be
standardised and consequently each company has to “construct” its own IC composed by the
knowledge needed to create wealth (Stewart, 1997). All this leads to the main point of this paper that
argues for the idea of IC as an object “to construct” or, in other words, that the nature of IC should be
considered predominantly “conventional”, i.e. an object which can be understood and recognised only
by a part of the society (as in the case study, the members of the focus group); consequently, IC can be
different for other societies of people and it can change over time as the circumstances of the people
making up the society (or company) change (Ijiri, 1967). In summary, in different companies and or
different time points it is possible to identify different ICs, with different boundaries but all are de?ned
and labelled as IC. Thus, it seems interesting to discuss an in vivo IC valuation from this point of view. 2.2
On IC valuation Valuation can be considered an accounting practice that is useful to represent a
phenomenon in order to compare it with other phenomena. This comparison can be done adopting four
different conceptions of value and valuation (Andriessen, 2004): one of these is ?nancial valuation, where
a criterion of value in monetary terms is de?ned. Some argue that even if IC ?nancial valuation has been
debated for a decade, it is still an open issue. The reasons for this could include the following. First,
valuation underlies a comparison and this contrasts with the absence of generally accepted guidelines
and with the ?rm-speci?c nature of IC. Second, the valuation methods and tools proposed are often
problematic, unrecognised and untested. Third, as mentioned above, the role played by IC in the value
creation process is not linear, it is dif?cult to map completely and is not totally clear and as a
consequence, it is dif?cult to translate in a valuation formula (Andriessen, 2004; Kaufmann and Schneider,
2004; Seetharaman et al., 2002). Several valuation methods and tools have been proposed, which can be
classi?ed as follows. First, it is possible to distinguish between valuation tools for internal ¨ jer and
(managerial) purposes and for external (disclosure) aims (Giuliani, 2009; Gro Johansson, 2000; Marr et al.,
2003; Mouritsen et al., 2001a). Another distinction can be made between static and dynamic approaches.
In the ?rst case, IC is mainly approached as a stock, as something that can be identi?ed, located,
measured and valued, just as any other resource, and is useful to visualise and understand the gap
between market value and book value (Edvinsson and Malone, 1997; Sveiby, 1997). Dynamic approaches
(Cuganesan, 2005; Marr et al., 2004) focus instead on the transformation processes, connections and
causal relationships between IC and organisational outcomes (Kaplan and Norton, 1992; Mouritsen et al.,
2001b). Hence, the contribution of IC to the value creation process becomes central (Cuganesan, 2005;
Mouritsen and Larsen, 2005; Skoog, 2003). According to Sveiby (2004), the approaches used for
measuring IC fall into four categories: (1) direct intellectual capital methods (DIC); (2) market
capitalization methods (MCM); (3) return on assets methods (ROA); and (4) scorecard methods (SC). While
the ?rst three approaches achieve a ?nancial value, the last determines a non-?nancial value or a
measure.
Construction and valuation of IC
379
JIC 12,3
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The last distinction proposed in this paper is between a holistic and an analytical approach, where the ?
rst aims to value the whole IC and the second aims to value speci?c IC components (Lev and Zambon,
2003; Sveiby, 2004). Independently from the method chosen, it has to be considered that a valuation
cannot be carried out in a single step, but that it is a rigorous process with several phases between
gathering information and obtaining the value (Penman, 2007). In general, the IC valuation process can be
described as follows (Andriessen, 2004; Lev, 2001): . visualising; . understanding; and . valuing. The ?rst
step is related to the identi?cation of IC, i.e. the choice of a de?nition to make reference to and the
consequent de?nition of its boundaries. Understanding relates to the diagnosis of IC or, in other words,
the investigation of how IC “works” and creates value. The last step is the choice and application of the
valuation formula and the reporting of the value. In examining the case study, these three steps will be
used as a guide. 2.3 On the qualities of IC value The plethora of valuation models, which differ from one
another in the hypotheses, objects and formulas considered (Andriessen, 2004; Sveiby, 2004), obviously
leads to different values (for a review, see, for example, Andriessen, 2004; Guthrie et al., 2001;
Seetharaman et al., 2002; Sveiby, 2004). In analysing these values, the normative qualities necessary for
accounting information to be useful have to be considered (Ijiri, 1967; Snavely, 1967; Vatter, 1963).
Various factors that presumably comprise good accounting information, such as relevance, reliability,
objectivity, consistency, comparability and understandability, have been identi?ed by the above-
mentioned authors. The decision to make reference in this study to the qualities proposed by the
framework IAS is due to the following reasons. First, even though these qualities are indicated for
disclosure purposes, some authors support the idea that they can also be used to analyse values
determined for internal purposes (Gordon and Shillinglaw, 1969, pp. 7-16; Riahi-Belkaoui, 2002, pp. 5-8;
Rosen?eld, 2006, pp. 84-103) and they have been considered desirable properties of any management
accounting information by the American Accounting Association[1]. Second, the International
Accounting Standards Board (2006) states that “with few exceptions, the information important to
management in managing the business is the same information that is important to investors in
assessing performance and future prospects”. Third, some researchers have highlighted a convergence
process between external ?nancial reporting and management accounting (Eierle and Shultze, 2008). All
in all, this implies that the aforementioned qualities, even if with different degrees of intensity, can be
considered for valuations, both for managerial and for disclosure purposes. 3. Valuing Ankon’s
intellectual capital 3.1 Design of the study The Ankon case study was undertaken using an action
research methodology, based on “a collaborative problem-solving relationship between the researcher
and client which aims at both solving a problem and generating new knowledge” (Coghlan and Brannick,
2001). More precisely, as will be described in the next paragraph, a modest intervention
¨ nsson and Lukka, 2005) due to the fact that the researchers approach was adopted (Jo took part in the
project only to offer their scienti?c and methodological support to Ankon’s management. Action
research methodology was chosen because it offers researchers a rich source of data from real settings
(Labro and Tuomela, 2003; Middel et al., 2006) and makes it possible to answer the strong call for case
studies in the accounting and IC ?eld (Cuganesan, 2005; Marr and Chatzkel, 2004; Mouritsen, 2006). 3.2
The research site The case study under investigation was developed between 2007 and 2009. Ankon is an
Italian ?rm (turnover e23m, 98 employees) and an important European player in die-casting processes of
zinc and aluminium alloys and related activities for the production of gas burners and components for
the automobile and household appliance industries. The problem perceived by Ankon was that the key
elements for its survival and success were becoming more and more intangible. In fact, despite the fact
that Ankon operates in a market in which there is typically a strong supremacy of the product, Ankon
decided to focus not only on the product per se, but also on design and post-sale services. Therefore it
de?ned the following two strategic objectives: (1) to develop its technical know-how in order to be able
to offer high quality standards; and (2) to change its relationships with its customers to evolve from a
supply relationship to a partnership. As a consequence of this decision, the management of Ankon
wanted to develop an accounting system that was able to support the visualisation, measurement and
management of the value of its intangibles (later also referred to as “IC”), which were crucial for a
successful development of the strategy adopted. The idea of achieving an IC value was mainly due to the
fact that the top management of the company (CEO and CFO) also wanted to start understanding how IC
impacts on the ?nancial performance of the company. Ankon was chosen as a case study because the
company wanted to develop a ?nancial valuation of its IC for internal use with the ambition to fully seize
it and without the constraint of being aligned to the ?nancial accounting standards in force. Moreover,
the strategy of Ankon is mainly centred on aspects such as a total quality approach, speci?c know-how
in design and production and internal processes, etc., and therefore IC is relevant in this context. Finally,
the company allowed us to take part in meetings where the valuation was discussed, and consequently
there was the opportunity to understand a valuation process “in vivo” instead of “in vitro”, as usually
happens. In order to design and implement the IC accounting system, the CEO promoted the creation of
a focus group formed by the researchers, the CEO itself, the CFO, the area managers, the purchase
manager, the R&D manager and the production manager. The focus group meetings were based on a
semi-structured agenda proposed by the researchers and which the authors initially discussed with the
CEO and the CFO, modi?ed and then put into action. As planned, ?ve meetings of about four hours each
were carried out together with some interviews with the members of the focus group and with some
employees. The latter were interviewed mainly to collect data. Based on the speci?c requests of the
focus group, the researchers supported Ankon’s management in coordinating and supporting the
discussions useful to design and
Construction and valuation of IC
381
JIC 12,3
implement the system. More details regarding the activities carried out by the researcher in each stage
of the valuation process are illustrated hereafter. 3.3 Visualising IC The ?rst step was to achieve a
consensus on the meaning of IC in order to understand “What are we talking about exactly?”, as the CEO
asked in one of the ?rst meetings. The focus group, with the scienti?c support of the researchers, de?ned
IC as the system of intangibles which have strategic relevance (Meritum, 2002). This de?nition was
proposed and then adopted, in line with the aim of the research project (development of an accounting
system able to monitor and manage IC in relation to the current strategy) and with the idea of
developing a selective accounting system that was able to focus the attention of the management only
on the most relevant intangibles. Moving from the strategic targets, the group started discussing the
critical IC resources they needed to achieve those goals, adopting a cause-and-effect approach based
on perceptions. By way of example, to achieve the desired level of technical know-how they needed to
have quali?ed and stable human resources supported by an up-to-date information system and speci?c
technologies, databases and processes, i.e. speci?c IC, tangible and ?nancial resources. Moreover, the
focus group asked the researchers to check on databases or previous research the strategic factors and
the intangibles usually monitored in the die-casting industry in order to have some external information
to compare with their results and to decide on possible integrations or modi?cations. Once the IC
resources were identi?ed, to facilitate the identi?cation and visualisation, the Meritum tri-partite model
was adopted: therefore, the intangibles were classi?ed into human capital, relational capital and
structural capital. The results of this stage are shown in Table I. This stage shows that the de?nition and
identi?cation of IC in practice has to deal with several problems. The ?rst is the theoretical de?nition
adopted as a reference: in case the focus group prefers to adopt a dissimilar de?nition (as one of the
aforementioned ones) the IC boundaries would be different. The second problem is that operationalizing
the IC theoretical de?nition chosen is not a linear process but an interactive one in which the fact
emerges that IC resources are bundled together ¨ m and Roberts, 2007). The third problem is that IC
resources have to be (Bjurstro identi?ed by the company through discussions and it is not possible to
make full reference to other players because IC is ?rm-speci?c and strategy-related (Mouritsen et al.,
2001b). All in all, IC turns out to be a “construction”. 3.4 Understanding IC After the visualisation, the
research moved to the design of a panel of indicators able to monitor the IC performance and the
activities carried out to create or develop IC. The idea to focus both on resources and on activities was
suggested by the researchers
Human capital Design competences Die-casting competences Production competences Loyalty Quality
of workplace relationships Structural capital Procedures Manuals Database Strategic software
Relational capital Relationships with customers Relationships with suppliers Relationships with
institutions Brands
382
Table I. Ankon IC resources
according to the Meritum model, discussed and then accepted by the focus group because it was
considered appropriate to monitor both the efforts made (activities) and the results achieved
(performance). In other words, the underlying idea is that the indicators on the activities are useful to
understand the trend recorded by the stocks, i.e. combining the static and the dynamic approaches.
The researchers proposed an initial draft of the panel of indicators to the focus group. Then, the other
members of the group modi?ed the preliminary panel in order to exclude indicators which were not
possible to calculate with the existing information system, to modify some of the proposed indicators
in order to make them more ?tting to the organisational context, and ?nally to include in the system
indicators which were already in use, considered useful but presented in the internal reports almost as
“stand-alone data”, such as the quality of the workplace index. Moreover, the members of the company
also took care to de?ne, for each indicator, the source of the data needed, the calculation process and
the person responsible for its implementation. As an example and making reference to one of the
aforementioned IC resources, the stock of customer capital was measured by ?rst dividing the
customers into “loyal and relevant customers” (i.e. the big, stable customers that generate a large part
of the pro?ts), “loyal customers” (i.e. stable customers of limited relevance like local ones) and “others”.
For each category, some of the indicators calculated are as follows: . number of total/new/lost
customers; . sales; . pro?tability index; . loyalty; . satisfaction indices; . cross-selling index; . rate of
penetration, etc. As mentioned, in order to understand the IC performance recorded by these
indicators, IC activities were also monitored through the following indicators: . number of sustained
audits; . hours/investments dedicated to developing existing customers; . hours/investments dedicated
to developing new customers; . number/investments in projects jointly developed with customers (e.g.
co-design activities); . number/investments in fairs; . brand investments; and . number of “improvement
plans” activated, etc. The indicators were calculated over a three-year period (2006-2008). The data,
which were useful to implement the panel, were partly extracted from Ankon’s information system and
partly collected through interviews, questionnaires, etc. After the implementation of the indicators and
based on the visual cognitive aids for managers proposed in the literature, a “visual” map was designed
to understand IC “in action” (Cuganesan, 2005; Marr et al., 2004). The map was built using a qualitative
mapping approach. This choice was made for two main reasons. The ?rst was that this
Construction and valuation of IC
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JIC 12,3
384
approach is particularly advantageous for creating visual maps in the early stages of investigating
complex processes, when more objective data are not available. The second reason was that it was
impossible to identify statistically relevant relations from the data collected through the
implementation of the panel of indicators (Abernethy et al., 2005). In order to draw the map, the
researchers systematised all the evidence regarding the perceived connections between the IC
resources discussed during the previous meeting. Then they drew a preliminary version of the map,
which was talked over by the focus group and modi?ed in order to de?ne the ?nal version. The idea of
combining the perception of the researchers with that of the members of the group came from a desire
to reduce the subjectivity of the mapping and an awareness of the risk of miscoding or
misunderstanding (multi-method approach) (Abernethy et al., 2005). The resulting map is presented in
Figure 1. In this step the group decided to focus on the relationships perceived as the most stable and
strategically relevant in order, on the one hand, to have a simpler and clearer visualisation, and on the
other hand, to concentrate on the linkages that were more likely to have a relevant in?uence on the
value creation process. By way of example, customer relationships have a direct and highly probable
impact on ?nancial performance, and therefore this item has been visualised in the map; the in?uence of
the company brand on the human capital, albeit perceived as existing (the company has a good brand
and reputation and therefore it facilitates the recruitment of quali?ed technicians and personnel), was
not drawn because it was considered not very stable and it was not so clear if and how it was possible
to manage it. All in all, the map that was drawn can be considered an interpretation of the business
model adopted by the company and of the connections between IC and ?nancial performance. 3.5
Valuing IC After the mapping step, the focus group moved to the core of the valuation. Following the
proposal of the researcher, a model inspired by the model designed by Tayles et al. (2002) was adopted.
More in depth, the ?nancial outputs of IC were derived from the
Figure 1. Ankon’s value creation map
indicators coupled together and taking into account the inter-relationships and the cause-and-effect
relationships previously mapped. Therefore, starting from the activities, their impacts on the company
IC performance and on the ?nancial performance were analysed. In Figure 2 the transformation process
for marketing and training activities into value is proposed as an example of the approach adopted. The
choice of this model was primarily due to the fact that the system had mainly an internal purpose, as
with the model Tayles et al. Secondly, it would serve to emphasise the contribution of IC to the value
creation process, i.e. to visualise and understand the dynamic dimension of IC; model of Tayles et al. is
based on cause-and-effect linkages, which are useful to monitor this IC perspective. Third, this approach
seems to reduce the risks of overvaluation due to the complex and overlapping nature of IC resources
(Lev, 2001). Moreover, in mapping and analysing the linkages it allows us to understand the bene?ts
generated by IC over time. Fourth, because it was based on cause-and-effect relationships (already
known by the company from the Balanced Scorecard) and on ?nancial measures (earnings, sales, costs,
etc.), it was easy to explain and readily understood by the focus group, as opposed to more innovative
IC valuation methods such as the Technology Broker, the IC index, etc. Fifth, this model makes it possible
to distinguish between the IC resources that the company perceives to have a direct impact on the ?
nancial performance from the those that play a supporting role. Finally, the model allows a visualisation
not only of the stock of single IC resources (analytical measurement approach), but also of the holistic
value of IC, and this was considered useful for understanding and managing this invisible resource. In
Ankon, the main differences with the model of Tayles et al. (2002) are the following. First, the EVA was
not adopted as an indicator of IC value but the extra earnings in comparison to the industry average
because it was not considered suitable for the speci?c purpose of this project (Mouritsen, 1998). Also,
taxation and the impact
Construction and valuation of IC
385
Figure 2. Examples of linkages identi?ed between activities, performance and value
JIC 12,3
386
of tangible and ?nancial assets were not taken into consideration, because they were not strategically
relevant and were assumed to be similar to the other players’ (“Everybody has or can have the same
equipment in our industry. The difference relates to how you use it”, the CEO said). Second, the
activities were not considered only as drivers of IC performance but also as cost-drivers (Cooper and
Kaplan, 1988): for example, the cost savings achieved thanks to a higher level of competences (þ
earnings) were matched with the extra costs for training and coaching (2 earnings) in order to have a net
vision of the ?nancial impact of IC. Even if this approach may not guarantee a full representation of IC
value, it seemed to be able to offer a reliable valuation and to represent, at least, the largest and the
most relevant part of IC and therefore to be useful for the purpose of the valuation. In order to de?ne
the linkages, the focus group started to analyse the impact of the main activities with the help of the
designed visual map. As well as the data used for calculating the indicators, ?nancial data were
extracted from the accounting system of the company. After collecting the historical ?nancial data the
focus group held a discussion session to make sense of them, i.e. in order to understand the intensity
and the timing of the IC impact. Considering the limited amount of data available, this step was run
adopting a qualitative approach, without any statistical support (e.g. regression and correlation
analyses). From past data and personal experience, the future earnings were forecast. By way of
example, it was expected that the investment in training done in 2007, which led to a cost savings of 20
per cent in 2008 and 10 per cent in 2009, would have brought an additional saving of 10 per cent in 2010;
the marketing activities developed in 2009 would have led in the near future to maintaining the same
earnings from the main (pro?table and loyal) European customers (analysis developed at a customer
level) and to gradually increasing sales in the new Asiatic market (number of new customers each year £
average “entry level” pro?tability). From all these extra pro?ts the costs generated by training and
marketing activities were subtracted to determine the “net earnings” to discount. In doing the
valuation mainly on the basis of perceptions, it was acknowledged that the value obtained would be a
rough result; there was also the belief that, thanks to this system, increased knowledge about IC would
be achieved and consequently, the quality of Ankon’s IC value would improve over time. In other words,
it was expected that as the company moved from an early stage to a mature stage of the system, the
quality of the data would become more and more reliable, “precise” and capable of supporting the
decision processes. 4. Discussion The argument of this study is that IC should be approached as a
“conventional” object (Ijiri, 1967). As shown in the case history, the identi?cation and de?nition of IC
were results of IC discussions, and consequently they are strictly related to the people who took part in
the meetings and to the point in time when the meetings took place. This leads us to highlight the
relevance of the social or organisational dimension of the IC valuation process (Mouritsen, 2009), i.e. the
central role of the focus group. In the case examined it was the focus group that chose the de?nition
and identi?ed the IC boundaries. It seems possible to think that a different “society”, i.e. a different
composition of the focus group, could have potentially adopted a different de?nition and/or had a
different perception of the resources needed to achieve the strategic goals. All of this would have
implied a different IC and consequently a different value. This
° rtensson, 2009), aspect contributes to making IC and its value not self-evident (Ma ¨ nnstro ¨ m and
because different IC resources can be included under the same label (Bra Giuliani, 2009). Pursuant to the
aforementioned considerations, it emerges that IC value can be understood in depth mainly by the
people who took part in the valuation. In fact, a person from outside the focus group may not know all
the rules to decode the label and the value (Graham, 2008), also because of the tendency to not disclose
all the ¨ nnstro ¨ m et al., 2009). information regarding IC (Bra The fact that IC cannot be touched but is a
“result” of perceptions enforces the idea ¨ m and Roberts, 2007; that IC is ?rm-speci?c and tied to the
organisation (Bjurstro Mouritsen et al., 2001b). In Ankon, there was perceived to be an inter-dependency
between human capital and customer capital and the possibility for human capital to generate value
was dependent on the availability of speci?c equipment and ?nancial resources to carry out training
activities. Hence, the case study shows that the contribution of IC to the value creation process is
dependent on the speci?c organisational context and on the capacity of the management to convert
“potential” value into “real” value. Consequently, the quanti?cation of a stand-alone value of IC with
general validity would mean the risk of not considering a relevant dimension of IC, i.e. connectivity, and
of transforming a natural heterogeneity into an arti?cial homogeneity. Overlooking the speci?c
connectivity potentially leads to an unreliable value because it will not be representative of the
phenomenon (Andriessen, 2004). Similar considerations are also supported by Lev (2001). Considering
that the IC value, as determined in Ankon, seems to be the ?nal result of a process in which assumptions
and perceptions play a major role, then it can be considered a tailor-made construction based on how
the focus group interprets the business model of the company and of its value creation dynamics. This
implies that the valuation process as followed in Ankon can be seen as a platform that is useful to talk
about IC, to understand its contribution to the value creation process and consequently, to think about
how and when it impacts on ?nancial performance (Mouritsen and Larsen, 2005). According to Skoog
(2003), regular use of the system can lead to a deeper and deeper understanding of IC and consequently,
gradually lead to a more reliable valuation because it will be based on more reliable input, on more
sophisticated perceptions. Assuming IC is a conventional object also implies a time consideration. In the
case study IC was de?ned with reference to the current strategy and analysed regarding a speci?c time
horizon. This suggests that IC changes over time on two levels. The ?rst is that IC changes its boundaries
over time in dependence of the modi?cation of the strategy and of the fact that IC resources can be
created, developed or destroyed. The second is that IC performance is not stable but unstable, i.e. can
decrease or increase, depending on the development or the regression of the IC resources and of the
interactions among them (Skoog, 2003). Moreover, as mentioned above, the IC accounting system can
also change over time (Giuliani, 2009) according to its use, by adding or elimination indicators. To
conclude, all of this can lead to some problems in comparing IC and its value over time, i.e. its
consistency. The study developed here suggests that more than the IC value per se, what can be mainly
relevant is the process, i.e. the pragmatic dimension of its value (Flamholtz, 1980). The pragmatic
dimension of IC has already been highlighted in some papers with reference to measurement systems
(Mouritsen, 2006), but the authors are not acquainted with similar analyses regarding the valuation
process. Valuation, as conceived in Ankon, allows for attention to focus not only on IC dynamics, but
also on
Construction and valuation of IC
387
JIC 12,3
its impact on ?nancial performance and on the time lags between activities and value creation, which are
often left out of the discussions (Giuliani, 2009; Skoog, 2003). All in all, while IC value per se presents
several criticalities such as limited reliability, understandability and comparability, the process can be
seen as a never-ending learning process that is useful in better supporting managerial processes. 5.
Conclusions Assuming IC to be a conventional object (Ijiri, 1967) and from the analysis of a case study in
which IC valuation was developed for internal purposes, this study highlights the relevance of the IC
valuation process in spite of the IC value per se. In fact, while IC value seems to present a limited level of
objectivity, consistency, comparability and understandability, its valuation process can be considered
an opportunity to visualise and understand IC and its in?uence on ?nancial performance. In other words,
IC valuation can be considered as a practice useful to crave the attention of the managers on IC in
action. The limitations of this study are as follows. First, they are related to the methodology adopted.
In fact, some may argue that in action research projects the researcher can potentially in?uence the
context under examination and be subjective in the analysis (Middel et al., 2006). In this case, even if the
researchers took part in the valuation process it was mainly for scienti?c and methodological support,
according to the modest interventionist approach, and therefore the observed reality was not in?
uenced and their perception of it was not altered or too subjective, considering the limited number of
activities carried out (Middel et al., 2006). The other main limitation is related to the case study
investigated. Part of the literature has highlighted that valuation dif?culties are more signi?cant for
small businesses compared to larger corporations, and that the severity of these valuation dif?culties is
greater for small, privately held manufacturing businesses versus their publicly traded competitors
(Shen and Reuer, 2005). This means that some of these conclusions may be in?uenced by the size of the
research site. The ?ndings provided by this research should be useful to those interested in studying IC
in action and in developing new valuation models or re?ning existing ones. Finally, considering that some
of the limitation of IC value can be related to the absence of generally accepted valuation guidelines
(e.g. the absence of a common de?nition, a single process, etc.), this can represent an incentive for
policy makers to draw up useful rules to make IC value more understandable for an outsider and to
identify managerial best practices. Future research opportunities can be found in more empirical studies
with the following ambitions: . to develop, test and re?ne IC valuation models (technical dimension); . to
analyse the effect of different compositions of focus groups in the development of measurement and
valuation processes (organisational dimension); and . to examine what the criticalities of an IC valuation
process are and how they should be managed in relation to the speci?c contexts (process dimension).
Note 1. See AAA Committee on Managerial Decision Models (1969), and AAA Committee on Concepts and
Standards – Internal Planning and Control (1974).
388
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teaches ?nancial accounting and business administration. Marco Giuliani is the corresponding author and
can be contacted at: m.giuliani@univpm.it Stefano Marasca is Full Professor in Accounting and Business
Administration at the University of the Marche (Italy). His research interests involve management
control and intellectual capital measurement systems. He teaches management control.
Construction and valuation of IC
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