CHAPTER 4Recognizing a Firm’s Intellectual Assets Moving be

CHAPTER 4
Recognizing a Firm’s Intellectual Assets:
Moving beyond a Firm’s Tangible Resources
Copyright Anatoli Styf/Shutterstock
©McGraw-Hill Education.
1
Learning Objectives
After reading this chapter, you should have a good
understanding of:
4-1 Why the management of knowledge professionals and
knowledge itself are so critical in today’s organizations.
4-2 The importance of recognizing the interdependence of
attracting, developing, and retaining human capital.
4-3 The key role of social capital in leveraging human capital
within and across the firm.
4-4 The importance of social networks in knowledge
management and in promoting career success.
4-5 The vital role of technology in leveraging knowledge and
human capital.
4-6 Why “electronic” or “virtual” teams are critical in
combining and leveraging knowledge in organizations and how
they can be made more effective.
4-7 The challenge of protecting intellectual property and the
importance of a firm’s dynamic capabilities.

2
The Importance of Intellectual Assets
Consider. . .
A company’s value is not derived solely from its physical
assets. Rather it is based on knowledge, know-how, and
intellectual assets – all embedded in people.
In the knowledge economy, wealth is increasingly created by
effective management of knowledge workers instead of by the
efficient control of physical & financial assets.
In today’s knowledge economy, it does not matter how big your
stock of resources is—whether it be top talent, physical
resources, or financial capital. Rather, the question becomes:
How good is the organization at attracting top talent and
leveraging that talent to produce a stream of products and
services valued by the marketplace? Human capital is the
foundation of intellectual capital, but the attraction,
development, and retention of human capital is a necessary but
not sufficient condition for organizational success. Social
capital, the appropriate use of technology, and protection of
physical and intellectual property are all also critical.
Knowledge economy = an economy where wealth is created
through the effective management of knowledge workers instead
of by the efficient control of physical and financial assets.
Investing in a company is, in essence, buying a set of talents,
capabilities, skills, and ideas – intellectual capital – not
physical and financial resources..

3
The Central Role of Knowledge
(1 of 2)
Intellectual capital is a measure of the value of a firm’s
intangible assets – the difference between a firm’s market value
& book value. It includes these assets:
Reputation
Employee loyalty & commitment
Customer relationships
Company values
Brand names
Experience & skills of employees
Intellectual capital = the difference between the market value of
the firm and the book value of the firm, including assets such as
reputation, employee loyalty and commitment, customer
relationships, company values, brand names, and the experience
and skills of employees. NOTE: the market value of a firm is
equal to the value of a share of its common stock times the
number of shares outstanding. The book value of a firm is
primarily a measure of the value of its tangible assets. It can be
calculated by the formula Total assets minus Total liabilities.
How do companies create value in the knowledge–intensive
economy? The general answer is to attract and leverage human
capital (intangible assets) effectively through mechanisms that
create products and services of value over time.
4
The Central Role of Knowledge
(2 of 2)
Human capital includes the individual capabilities, knowledge,
skills, and experience of the company’s employees and
managers.

Social capital includes the network of relationships that
individuals have throughout the organization.
Knowledge management is critical to organizational success.
Knowledge includes:
Explicit knowledge – codified, documented, easily reproduced,
and widely distributed
Tacit knowledge – in the minds of employees, based on their
experiences and backgrounds
Human capital = the individual capabilities, knowledge, skills,
and experience of a company’s employees and managers. This
knowledge is relevant to the task at hand, and also includes the
ability to add to this reservoir of knowledge, skills, and
experience through learning. Social capital = the network of
friendships and working relationships between talented people
both inside and outside the organization. Relationships are
critical in sharing and leveraging knowledge and in acquiring
resources. Social capital can extend beyond the organizational
boundaries to include relationships between the firm and its
suppliers, customers, and alliance partners. Explicit knowledge
= knowledge that is codified, documented, easily reproduce, and
widely distributed. Tacit knowledge = knowledge that is in the
minds of employees and is based on their experiences and
backgrounds. New knowledge is constantly created through the
continual interaction of explicit and tacit knowledge. Another
important issue is the role of “socially complex processes,”
which include leadership, culture, and trust. These processes
play a central role in the creation of knowledge. They represent
the glue that holds the organization together and helps to create
a working environment where individuals are more willing to
share their ideas, work in teams, and, in the end, create products
and services of value.
5

Question
(1 of 2)
Mary Stinson was required to take over a project after the entire
team left the company. She was able to reconstruct what the
team had accomplished through reading e-mails exchanged by
the previous teams members. This is an example of
using explicit knowledge.
inefficient use of information management.
using tacit knowledge.
all of the above.
Answer: A. Explicit knowledge gained through reading the e-
mails.
6
Human Capital
Exhibit 4.2 Human Capital: Three Interdependent Activities
The importance of talent to organization success is hardly new.
Organizations must attract talented people—employees at all
levels with the proper sets of skills and capabilities coupled
with the right values and attitudes. Such skills and attitudes
must be continually developed, strengthened, and reinforced,
and each employee must be motivated and his or her efforts
focused on the organization’s goals and objectives so this
human capital can be retained. Hiring is only the first of three
processes in which all successful organizations must engage to
build and leverage their human capital. Firms must also develop
employees to fill their full potential to maximize their joint
contributions. Finally, the first two processes are for naught if

firms can’t provide the working environment and intrinsic and
extrinsic rewards to retain their best and brightest.
7
Attracting Human Capital
Hire for attitude, train for skill - emphasis on:
General knowledge & experience
Social skills, values, beliefs, attitudes
Use sound recruiting approaches & networking:
Build a pool of qualified candidates
Attract the “right” job candidates, not the greatest number of
them
Current employees may be the best source of new ones, so
provide incentives for referrals
Understand the value of millennials:
Tech-savviness, ability to innovate
Racially diverse
The first step in building superior human capital is input
control: attracting and selecting the right person. Some human
resource professionals argue that firms can identify top
performers by focusing on key employee mind-sets, attitudes,
social skills, and general orientations. If they get these elements
right, the task-specific skills can be learned quickly. Companies
that take hiring seriously must also take recruiting seriously.
The challenge becomes having the right job candidates, not the
greatest number of them. Strategy Spotlight 4.3 explains how
millennials have a different take on diversity, therefore are
valuable if they are recruited into an inclusive culture of
fairness and representation for all.
8
Developing Human Capital
Training and development must take place at all levels of the

organization.
Requires the active involvement of leaders at all levels
Includes mentoring & sponsoring lower-level employees
Emphasizes the need to monitor progress & track development
so knowledge can be shared
Consider evaluating human capital to assess the “soft” skills.
Use 360-degree.e evaluation & feedback systems
It’s not enough to hire top level talent and expect that the skills
and capabilities of those employees remain current throughout
the duration of their employment. Rather, training and
development must take place at all levels of the organization.
Mentoring is traditionally viewed as a program to transfer
knowledge and experience from more senior managers to up-
and-comers. Mentoring can help recruit qualified managers,
decrease turnover, fill senior level positions with qualified
professionals, enhance diversity initiatives with senior-level
management, and facilitate organiza tional change efforts. A
sponsor is someone in a senior position who’s willing to
advocate for and facilitate career moves, make introductions to
the right people, translate and teach the secret language of
success to their protégé. Systems for monitoring progress and
tracking development need to evaluate the softer dimensions of
communications and social skills, values, beliefs, and attitudes.
Traditional top-down appraisal systems become insufficient as
organizations continue to push responsibility downward. 360-
degree evaluation and feedback systems = superiors, direct
reports, colleagues, and even external and internal customers
rate a person’s performance. Employees must share knowledge
and work together, collectively, to reach organizational goals.
Evaluation systems must ensure that a manager’s success does
not come at the cost of compromising the organization’s core
values.
9

Retaining Human Capital
Retention mechanisms must prevent the transfer of valuable and
sensitive information outside the organization.
Help employees identify with an organization’s mission and
values.
Provide challenging work and a stimulating environment.
Offer financial and nonfinancial rewards & incentives.
Money is not the most important reason why people take or
leave jobs.
Investment in management & employee training, and
recognition of efforts increase retention.
Leaders can either provide the work environment and incentives
to keep productive employees and management from wanting to
bail out, or they can use legal means such as employment
contracts and noncompete clauses. Firms must prevent the
transfer of valuable and sensitive information outside the
organization. Failure to do so would be the neglect of the
leaders’ fiduciary responsibility to shareholders. Exodus of
employees can erode a firm’s competitive advantage. A
cohesive culture, challenging work, and valued rewards are all
vital organizational control mechanisms for retaining human
capital. (See more about this in Chapter 9.) Also see Strategy
Spotlight 4.2: Some companies trying to increase employee
retention are using data analytics to get a feel of where
management can make changes that will improve the chances
ultimately stay there.
10
Enhancing Human Capital:
Redefining Jobs & Managing Diversity

Redefining jobs – breaking high-end knowledge work into
specialized pieces - helps address skill shortages.
Sound management of diverse workforces can improve an
organization’s effectiveness & competitive advantages through
Lower cost
Better reputation, leading to resource acquisition
Marketing sensitivity to client cultures
Creativity through diversity of perspectives
Better problem solving
Greater organizational flexibility
A worldwide shortage of skilled workers means firms must
redefine jobs – investing in apprenticeships, transferring some
tasks to lower level or outsourced people. By identifying the
gap between the talent your firm has and what it requires;
creating narrower, more-focused job descriptions in areas where
talent is scarce; selecting from various options to fill the skills
gap; and rewiring processes for talent and knowledge
management, this can lower costs and increase job satisfaction
of the experts who remain. A combination of demographic
trends and accelerating globalization of business has made the
management of cultural differences a critical issue. Workforces,
which reflect demographic changes in the overall population,
will be increasingly heterogeneous along dimensions such as
gender, race, ethnicity, and nationality. The effective
management of diversity can enhance the social responsibility
goals of an organization. Cost: firms effective in managing
diversity will have a cost advantage over those that are not.
Resource acquisition: firms with excellent reputations as
prospective employers for women and ethnic minorities will
have an advantage in the competition for top talent. Marketing:
the insight and cultural sensitivity that members with roots in
other countries bring to marketing efforts will be very useful.
Creativity: less emphasis on conformity to norms of the past

and diversity of perspectives will improve the level of
creativity. Problem solving: heterogeneous groups typically
produce better decisions because of the wider range of
perspectives. Organizational flexibility: with effective programs
to enhance workplace diversity, systems become less
determinate, less standardized, and therefore more fluid. Such
fluidity should lead to greater flexibility to react to
environmental changes. See Strategy Spotlight 4.3 for how
millennials view diversity.
11
Social Capital
Social capital – the friendships and working relationships
among talented individuals – helps tie knowledge workers to a
given firm.
Interaction, sharing, and collaboration will help develop firm-
specific ties, with a higher probability of retaining key
knowledge workers.
Successful firms are well aware that the attraction,
development, and retention of talent is a necessary but not
sufficient condition for creating competitive advantages. In the
knowledge economy, it is not the stock of human capital that is
important, but the extent to which it is combined and leveraged.
The development of social capital – the friendships and working
relationships among talented individuals – helps tie knowledge
workers to a given firm. Competitive advantages tend to be
harder for competitors to copy if they are based on “unique
bundles” of resources. So, if employees are working effectively
in teams and sharing their knowledge and learning from each
other, not only will they be more likely to add value to the firm,
but they also will be less likely to leave the organization,
because of the loyalties and social ties they develop over time.
12

How Social Capital Helps Attract and Retain Talent
Hiring via personal (social) networks:
Some job candidates may bring other talent with them – the
Pied Piper effect.
Talent can emigrate from an organization to form startup
ventures.
Social networks can provide a mechanism for obtaining
resources and information from outside the organization.
See the example of the Pied Piper effect at Third Millennium
Communications.
13
Social Networks
Social network analysis depicts the pattern of interactions
among individuals and helps to diagnose effective and
ineffective patterns.
Who links to whom within the network or cluster?
Who communicates to whom and how effective is this
communication?
Social ties can link individuals so they can
Convey needed resources.
Exchange information & support.
Treat each other in positive ways.
Develop trusting relationships to improve the groups’
effectiveness.
Social networks can link people, ideas, and resources that
wouldn’t normally be connected top each other., thereby
providing access to assets that can bring about important change
in organizations. Social network analysis = analysis of the

pattern of social interactions among individuals. Analysis of
communication patterns is helpful because the configuration of
group members’ social ties within and outside the group affects
the extent to which members connect to individuals who:
convey needed resources, have the opportunity to exchange
information and support, have the motivation to treat each other
in positive ways, and, have the time to develop trusting
relationships that might improve the group’s effectiveness.
Developing social capital requires interdependence among
group members. Social capital erodes when people in the
network become independent. And increased interactions
between members aid in the development and maintenance of
mutual obligations in a social network.
14
Example: Social Network Analysis
Exhibit 4.4 A Simplified Social Network
Jump to Appendix 1 for long description.
In this diagram the links are used to depict informal
relationships among individuals involving communication
flows, personal support, and advice networks. There may be
some individuals with literally no linkages, such as Fred. These
individuals are typically labeled “isolates.” However, most
people do have some linkages with others. There are two
primary types of mechanisms through which social capital
flows: closure relationships depicted by Bill, Frank, George,
and Susan, where one member is central to the communication
flows in a group; and bridging relationships, depicted by Mary,
where one person bridges or brings together groups that would
have otherwise been unconnected.

15
Social Network Analysis
Closure Relationships
The degree to which all members of the social network have
relationships with other group members
Bridging Relationships
Relationships in a social network that connect otherwise
disconnected people
Both closure and bridging relationships have important
implications for the effective flow of information in
organizations and for the management of knowledge. Closure =
the degree to which all members of the social network have
relationships (or ties) with other group members. Through
closure, group members develop strong relationships with each
other, high levels of trust, and greater solidarity. Bridging
relationships = relationships in a social network that connect
otherwise disconnected people. Employees who bridge
disconnected people tend to receive timely, diverse information
because of their access to a wide range of heterogeneous
information flows. Structural holes = social gaps between
groups in a social network where there are few relationships
bridging the groups. Example: sales and engineering are two
groups where members traditionally interact more with their
peers than across group boundaries.
16
Social Networks: Implications for Career Success
Effective social networks provide advantages for the firm AND
for an individual’s career advancement.
Access to private information communicated in the context of

personal relationships
Access to diverse skill sets – trading information or skills with
people whose experiences differ from your own
Access to power
Private information = information that is not available from
public sources, and is usually communicated in the context of
personal relationships. Public information = information that is
available from public sources such as the Internet. Success is
also tied to the ability to transcend natural skill limitations
through others. Training information or skills with people
whose experiences differ from your own provides you with
unique, exceptionally valuable resources. You can also gain
power by being a network broker, or someone who bridges
multiple networks. Network brokers can adapt to changes in the
organization, develop clients, and synthesize opposing points of
view. Brokers are especially powerful because they connect
separate clusters, thus stimulating collaboration among
otherwise independent specialists.
17
Social Capital: Potential Downside
Social capital does have some potential downsides.
Groupthink
Dysfunctional human resource practices
Expensive socialization processes (orientation, training)
Distortion or selective use of information to favor preferred
courses of action
Groupthink = a tendency in an organization for individuals not
to question shared beliefs. Groupthink may occur in networks
with high levels of closure where there is little input from

people outside of the network. If there are deep-rooted
mindsets, there could be a tendency to develop dysfunctional
human resource practices. The organization could continue to
hire, reward, and promote like-minded people who tend to
further intensify organizational inertia and erode innovation.
Socialization processes such as orientation and training can be
expensive in terms of both financial resources and managerial
commitment. A cost-benefit analysis is encouraged. Individuals
may also use the contacts they develop to pursue their own
interests and agendas in ways that may be inconsistent with the
organization’s goals and objectives – engaging in unethical or
illegal acts. (Chapter 9 contains discussion of behavioral
control mechanisms that reduce such dysfunctional behaviors
and actions.)
18
Using Technology to Leverage Human Capital and Knowledge
Sharing knowledge and information throughout the organizatio n
Conserves resources
Develops products and services
Creates new opportunities
Technology can leverage human capital & knowledge
Within the organization
With customers
With suppliers
Sharing knowledge and information throughout the organization
can be a means of conserving resources, developing products
and services, and creating new opportunities. Technology can be
used to leverage human capital and knowledge within
organizations as well as with customers and suppliers beyond
their boundaries.
19

Networks & Electronic Teams: Share Information & Enhance
Collaboration
Using networks to share information and develop products and
services
Through e-mail
Through an intra-company news feed
Using electronic teams or e-teams to accelerate product
development
Advantages: few geographic constraints; access to multiple
social contacts
Challenges: failure to identify team members with the most
appropriate knowledge and resources; low cohesion, low trust,
lack of shared understanding creates “process loss”
E-mail is an effective means of communicating a wide variety
of information. It is quick, easy, and almost costless, however it
can be excessive, and embarrassing if one is not careful.
Electronic teams = a team of individuals that completes tasks
primarily through e-mail communication. However, such teams
require members who can identify those among them with the
most appropriate knowledge and resources; and members need
to know how to combine individual contributions in the most
effective manner for a coordinated and appropriate response.
“Process losses” prevent teams from reaching high levels of
performance because of inefficient interaction dynamics among
team members.
20
Question
(2 of 2)
Which of the following is NOT an advantage of electronic teams
(e-teams)?
They can facilitate communication.
They have the potential to acquire a broader range of human

capital.
They can be effective in generating social capital.
They’re less flexible in responding to unanticipated work
challenges.
Answer: D. If e-team leaders and team members do not know
how to combine individual contributions in the most effective
manner they will not be able to create a coordinated appropriate
response.
21
Codifying Knowledge for Competitive Advantage
Explicit (codified) knowledge
Can be documented
Can be widely distributed
Can be easily replicated
Can be reused many times at very low cost
Tacit knowledge
Embedded in personal experience
Shared only with the consent and participation of the individual
Has the organization effectively used technology to codify
knowledge for competitive advantage?
Tacit knowledge is embedded in personal experience and shared
only with the consent and participation of the individual.
Explicit (or codified) knowledge, on the other hand, is
knowledge that can be documented, widely distributed, and
easily replicated. One of the challenges of knowledge-intensive
organizations is to capture and codify the knowledge and
experience that, in effect, resides in the heads of its employees.

See Strategy Spotlight 4.5 for how SAP has been able to
leverage the expertise and involvement of its users to develop
new knowledge and transmit it to SAP’s entire user community.
22
Protecting Intellectual Assets
Intellectual property rights are more difficult to define and
protect than property rights for physical assets.
Unlike physical assets, intellectual property can be stolen.
If intellectual property rights are not reliably protected by the
state, there will be no incentive to develop new products and
services.
Firms can use technology, attract human capital, or tap into
research and design networks to get access to information.
However employees can become disgruntled and patents can
expire. Where is the firm’s sustainable competitive advantage
then? Intellectual property rights = intangible property owned
by a firm in the forms of patents, copyrights, trademarks, or
trade secrets. Protecting a firm’s intellectual property requires a
concerted effort on the part of the company. Effective
protection of intellectual property is necessary before any
investor will finance such an intricate undertaking. Intellectual
property is characterized by significant development costs and
very low marginal costs. Once developed, though, the
reproduction and distribution cost (or variable costs) may be
almost zero. (See Case 15, Zynga, for a discussion of how one
company has struggled with this.)
23
Protecting Intellectual Assets Through Dynamic Capabilities
Dynamic capabilities involve the capacity to build and protect a
competitive advantage.
Requires knowledge, assets, competencies, and complementary

assets & technologies
Requires the ability to sense & seize new opportunities,
generate new knowledge, and reconfigure existing assets &
capabilities
Include internal processes & routines that enable product
development, strategic decision making, alliances, or
acquisitions
Dynamic capabilities = a firm’s capacity to build and protect a
competitive advantage, which rests on knowledge, assets,
competencies, complementary assets, and technologies.
Dynamic capabilities include the ability to sense and seize new
opportunities, generate new knowledge, and reconfigure
existing assets and capabilities. Dynamic capabilities may be
one of the best ways that a firm can protect its intellectual
property. Dynamic capabilities are related to the entrepreneurial
side of the firm and are built within a firm through its
environmental and technological sensing apparatus, its choices
of organizational form, and its collective ability to strategize.
Dynamic capabilities are about the ability of an organization to
challenge the conventional wisdom within its industry and
market, learn and innovate, adapt to the changing world, and
continuously adopt new ways to serve the evolving needs of the
market.
24
Summary: Creating Value Through Intellectual Assets
Human capital: Does the organization effectively attract,
develop, and retain talent? Does the organization value
diversity?
Social capital: Does the organization have positive personal and
professional relationships among employees?
Do the social networks within the organization have the
appropriate levels of closure and bridging relationships?

Technology: Does the organization effectively use technology
to transfer best practices across the organization, codify
knowledge, and develop dynamic capabilities for competitive
advantage?
Intellectual assets or intangible resources are critical to
organizational success. The growing importance of knowledge,
coupled with the move by labor markets to reward knowledge
work, tells us that investing in a company is, in essence, buying
a set of talents, capabilities, skills, and ideas – intellectual
capital – not physical and financial resources. Here are some
questions organizations should ask. See Exhibit 4.5: Issues to
consider in creating value through human capital, social capital,
and technology.
25
APPENDICES
Description of Images
Appendix 1 Example: Social Network Analysis
Return to slide.
The graphic shows a simplified social network.
Fred is outside of the group, or an "isolate." He has no
connections to the other five.
Mary is shown with connections to the other four, George, Bill,
Frank, and Susan.
However, none of these four have connections to each other or
Fred, only to Mary.

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