A Layman Guide to ICM

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Enterprise Renewal

and

Innovation

A Laymans guide

to

Intellectual Capital Management


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Enterprise Renewal and Innovation:

A Laymans guide to Intellectual Capital Management

Copyright2009

By

Manufacturing Enterprise Integration and Innovation Association Limited

Editorial Support

Asia Intellectual Capital Alliance Limited

All right reserved. No part of this book may be reproduced in any

forms or by any means, electronic, mechanical, photocopying,

recording, or otherwise, including information storage and retrieval

systems, without permission in writing from the publisher, except by a

reviewer who may quote brief passages in a review.

Printed in Hong Kong

First Edition

Published by

Manufacturing Enterprise Integration and Innovation Association Limited

Flat B, 15/F., Winsan Tower, 98 Thomson Road, Wanchai, Hong Kong


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i

Contents

Acknowledgments iii

The Publisher iv

The Editor v

Preface vii

Chapter 1 Introduction 1

Chapter 2 Managing Intellectual Capital in Organisations 11

Chapter 3 Intellectual Capital Management Applications 19

Chapter 4 Case Studies 39

Chapter 5 Benefits of Intellectual Capital Management51

Chapter 6 Concluding Remarks 55


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ii


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iii

Acknowledgments

Manufacturing Enterprise Integration and Innovation

Association (MEIIA) is happy to present you with this

booklet. We would like to express our gratitude to

Professional Services Development Assistance Scheme

(PSDAS) of the Commerce and Economic Development

Bureau of the HKSAR Government for the financial

support that make the publication of this booklet, with

the associated seminar and workshops, possible.

MEIIA would also like to thank Asia Intellectual Capital

Alliance Limited for the editorial work in support of the

publication of this booklet.

Wallenius Wilhelmsen Logistics, Billerud and InterQoS

have been very kind in sharing their experience in

Intellectual Capital Management. A brief description of

their cases appears in Chapter 4.

The Project Steering Committee of MEIIA and a group of

layman serving on the booklet review panel have made a

number of comments and suggestions and these have

been incorporated in the present edition.


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iv

The Publisher

Manufacturing Enterprise Integration and Innovation

Association Limited (MEIIA)

MEIIA is founded in November 2006 as a not-for-profit

cross-industry organisation that focuses on integration

and innovation to help enterprises increase their

competitiveness. They believe the key to leverage

technology is the attention to organisation culture,

business process and performance measurement. The

scope should not cover only the enterprise itself but also

the entire supply chain. Their mission is to help

manufacturing companies in Hong Kong to survive and

prosper irrespective of where their plants may locate.

Furthermore, as an information platform in industrial

manufacturing sector, they facilitate manufacturing

enterprises in making use of human resources,

information technology and business plan through

practical experience exchange, which would also

integrate organisational structure, process, technology,

investment and strategic innovation.


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v

The Editor

Asia Intellectual Capital Alliance Limited (AICA)

AICA is founded by a group of Hong Kong and Swedish

Intellectual Capital (IC) practitioners and entrepreneurs.

It is a collaboration of local and overseas angel investors

as well as researchers and developers of Intellectual

Capital Management (ICM) tools and methodologies. Its

founders have experience in orchestrating the release of

hidden values with a number of partners through its

Enterprise Renewal and Innovation (ERI) programme.

The ERI partners of AICA ranging from new start-up to

multi-national companies. AICA helps companies

increase their growth innovation and performance, thus

enhancing their competitiveness.

In addition, AICA aims at assisting companies to

accelerate their business growth through the use of the

most advanced Intellectual Capital Management

methodologies. It works as a business partner and

investor in assisting the newly-formed enterprises in their

development stage, and the well-established companies

in their reorganisation stage to formulate the strategy,

implementation and evaluation.


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vi


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vii

Preface

In March 2009, the Intellectual Property Department, the

Innovation and Technology Commission and the Trade

and Industry Department of the HKSAR Government

jointly launched an Intellectual Capital Management

Consultancy Programme to provide free consultancy

services to enterprises, in particular SMEs, in Hong Kong.

The aim is to help enterprises to gain an understanding of

Intellectual Capital Management and to learn to use

appropriate tools to exploit business opportunities and to

compete more effectively in the market. These kinds of

public sector initiatives to help business to compete using

Intellectual Capital are not new. For example, the

Ministry of Economics, Trade and Industry of Japan,

together with its SME agencies, have been involved in

setting guidelines and in promoting the use of Intellectual

Capital Management amongst SMEs in Japan.

While the Consultancy Programme has been successful

in exposing enterprises to the power of Intellectual

Capital Management, Manufacturing Enterprise

Integration and Innovation Association (MEIIA) has

identified the need to develop a pool of change agents,

business and IT consultants who are knowledgeable in

Intellectual Capital to serve the business community in


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Hong Kong. MEIIA therefore applied for funding support

from the Professional Services Development Assistance

Scheme (PSDAS) of the Commerce and Economic

Development Bureau of the HKSAR Government to run a

public seminar and two one-day workshops, entitled

Enterprise Renewal and Innovation, to build up such a

pool of Intellectual Capital professionals. Part of the

PSDAS funding also supports the publication of a

laymans guide to Intellectual Capital Management (this

booklet), as well as a DVD for self-learning of the tools of

Intellectual Capital Management. Both the booklet and

DVD can be obtained from MEIIA.

Companies that have started to adopt Intellectual Capital

Management in their business planning and practices

have found this set of framework and tools extremely

helpful in sharpening their competitive edge and in

protecting their valuable intellectual assets. We hope you

will enjoy reading this book, have fun in your Intellectual

Capital Management journey, and a happy future!


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Enterprise Renewal and Innovation: A Laymans guide To ICM 1

Chapter 1

Introduction

Why Intellectual Capital?

Running a business in an increasingly competitive

economy is not easy, especially after the recent global

credit crunch and financial crisis. While demand may

recover somewhat, corporate buyers and consumers are

increasingly looking for value for money. Investing heavily

in physical resources such as factories, offices, shops or

machinery may not necessarily leads to growth,

above-average earnings and sustainable competitive

advantages. Even before the present crisis, strategies

based on economy of scale many a times cannot compete

with those using open, web 2.0 like supply chain.

Although financial and physical assets are still important,

what helps drive success and create values are

components of intellectual capital such as the right kind

of experience, knowledge and skills; a reputable brand,

strong partnership with suppliers of key materials and

components; an in-depth knowledge of clients and

markets; and a culture of innovation.


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2 Chapter 1 Introduction

Some of the heavy weight

companies in terms of market

capitalisation such as Google,

Microsoft, and Apple

Computers do not have much

physical assets and their

success is derived from their

intellectual capital. Even for

industries that involve

substantial physical assets

such as Tesco and Carrefour of

the supermarket sector, they

derive value from their

physical assets through the

knowledge of where to locate

their stores; the profile of their

local clientele and hence what

and how much goods to stock; and their skill in refilling

their shops at the appropriate time. In another words,

they release values from their physical assets through the

use of their intellectual capital. Without the right kind of

intellectual capital, physical assets are just me-too

commodities that do not confer any uniqueness, and

hence no competitive advantage.


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Does Intellectual Capital Really Exist?

In modern day economies, people emphasize on the

market capability and capital budgeting aspects of an

organisation such as tangible and financial assets.

However, book value, which acts as an indicator

reflecting the value of tangible and financial assets of a

company, is valued at multiples of times less than its

market capitalisation. The difference in book and market

values comes from Intellectual Capital.

Figure 1

Market Capitalisation and Book Value

(Source: The Power Of Intangible Assets: An Analysis Of The S&P

500, Ocean Tomo White Paper, March 2006)

Components of S&P500 Market Capitalisation


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What is Intellectual Capital?

Intellectual Capital is usually intangible. For a typical

organisation, it includes your people, your unique way of

doing things and your business network. These are the

intangibles that give your enterprise its uniqueness and

competitive advantages. These three kinds of intangibles

are commonly referred to as Human Capital (HC),

Structural Capital (SC) and Relational Capital (RC).

HUMAN CAPITAL includes all the experience, skills,

competence and knowledge of people, for which would no

longer be accessible to your enterprise as your employees

walk out of the office at night. Traditionally retaining

Human Capital usually refers to the actions of reducing

turnover rate. Enhancing Human Capital sometimes may

associate with staff development programmes. Under this

Intellectual Capital framework as discussed in the

following chapters, there are other means of developing

and releasing values from your human capital.

STRUCTURAL CAPITAL covers many elements such as

business processes, organisational structure, policies,

procedures, culture, etc. In the words of Professor Leif

Edvinsson, it is the asset that remains when the


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employees have gone home for the day. You may own the

Structural Capital of your company, but that is hardly

the case for Human Capital.

RELATIONAL CAPITAL refers to your business

relationships with any outside person or organisation. It

includes customers, suppliers, stakeholders, brand

image, product and service reputation, and many others.

It is volatile and not under your control, but when

managed carefully you can make use of these external

resources and turn them into economic values.


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Figure 2

Three Kinds of Intellectual Capital with Examples


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Evolution of Intellectual Capital Management

One of the first attempts in developing a framework for

intellectual capital management was made by Professor

Karl-Erik Sveiby some 20 years ago. Professor Sveiby

proposed the theory of measuring knowledge capital

and further categorised it into customer, individual

and structural capitals. In the 1990s, Mr. Thomas

Stewart coined the phrase and used it in the cover

story ofFortune. At about the same time, Professor Leif

Edvinsson developed an intellectual capital management

system for use at Skandia AFS, a Swedish insurance

company. Skandia AFS published the worlds first

intellectual capital report in 1995.

Since the late 20th century, much research and

development has been conducted in the field of

intellectual capital management, especially in Europe.

Individual national approaches to intellectual capital

management have been developed. Up to now, there are

no common standards to measure and manage

intellectual capital.


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RICARDIS (a project commissioned by EC between

January 2006 and December 2007) was one of such

projects in Europe, for which the aim was to standardise

intellectual capital management methods in the

European region. Another project is InCaS. InCaS was

launched in 2007, addressing the issues learnt from a

German Wissensbilanze project (started in 2004 that

resulted in an open intellectual capital management

software) and finally came up with a guideline for

preparing intellectual capital statement.


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In the Asian Pacific region, the intellectual capital

management emerged from South Korea, Malaysia, China,

Japan, as well as in Australia. For example, the Ministry

of Economy, Trade and Industry, Japan (METI) published

the guideline for intellectual assets management and

disclosure in 2005, and had extended the scope of work

to cover intangible asset-based financing.

The management of intellectual capital seems to have

extended to the national level recently. The search for

effective approaches to intellectual capital measurement

is still evolving, so is the research into a more dynamic

and eco method of value creation.


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12 Chapter 2 Managing IC in Organisations

Before implementing any intellectual capital

management programme, many companies may choose

to conduct an exercise to uncover and measure the

performance of existing intellectual capital. In layman

terms, most companies prefer to conduct a health check

to unveil whether or not its business objectives and

strategies are well supported by its human capital,

structural capital and relational capital. The

measurement results will then be consolidated in a

written document, either in the form of a report or a

statement. The health check exercises in general cover

the following elements:

Taking a snapshot of the current businessenvironment

Identifying the growth constraints under the currentintellectual capital portfolio (i.e. the distribution of

human, structural, and relational capitals)

Determining the political and cultural landscape forintellectual capital management implementation

Studying the desired business environment so as todeploy the best combination of tools for a change

campaign


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Start the Work by Identifying your Intellectual Capital

The first step requires identifying your intellectual capital.

It can be done through conducting surveys, interviews or

facilitating workshops. It is always helpful to create a

template and use it to search for the diversified intangible

resources of the company. The template has to be

developed based on:

(1)The core value adding processes(2)The mission and strategic objectives of the company

The information collected

through this process sets

the foundation and serves

as the indicators to

measure and map out

the value of intellectual

capital.


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Assessing Intellectual Capital

It is difficult to quantify intellectual capital. Taking

innovation as an example, it is almost impossible (or

impractical) to articulate the value-add created in

brainstorming sessions and knowledge caf, although it

is well recognized that innovation is substantially created

through these kinds of networking activities. Even if data

is collected on the number of brainstorming sessions held

last year, it cannot totally reflect how innovative it is.

Measuring intellectual capital is not merely a counting

exercise. It is a relative and contextual exercise within the

business environment of the company.

You should answer the following questions when you

assess the value of intellectual capital:

How important are the intellectual capitalcomponents to your core business? It could be a

relative measure ranking the importance among the

various components.

The performance of this intellectual capitalcomponent in the company. You should invite the

employees to grade it on a scale.


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If you take these two dimensions and perform a gap

analysis, you will have a clear picture on how you should

prioritise all your intellectual capital management

activities.

Importance Performance1 = not at all

important

10 = veryimportant

1 = very bad10 = very good

Protecting Intellectual Property 8 7

Satisfying industrial needs 3 5

Generating creative ideas 9 5

Linking up various industrial

sectors 3 3

Capturing lessons learnt fromprojects

2 3

Knowledge sharing amongdivisions

7 2

Documenting operationalprocedures

5 8

Publications and white papers 2 7

New product development 9 2

Figure 3

Example Assessing the Importance of Intellectual Capital Components


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Analysing the Value of Intellectual Capital

to the Enterprise

At the end of the above exercise, you will see that an

enterprise would have a wide range of intellectual capital,

and yet not all components of the intellectual capital

would contribute to the value and competitiveness of the

company. This is because many components of

intellectual capital have been developed or acquired by

the enterprise in support of its stated strategic intent in

the form of Mission, Vision and Value Contribution

statements. In the course of running a business, the

operation will usually lead to a number of intellectual

capital components that the enterprise may not put to

immediate use. One of the aims of the present analysis

exercise is to identify how the various intellectual capital

components that the executives believe are important

contribute to the value-creation process of the company.

Another angle of analysis is to note how the various

intellectual capital components work together,

reinforcing each other. Again taking the case of a

reputable supermarket, its brand name is usually

reinforced by an efficient distribution network, its

supplier relationship and its in-depth knowledge of local

clientele, if it has them. On the other hand, if a weakness


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is developed in any one of the above components and the

decay is not arrested in time, the brand name of the

supermarket will suffer. One may remember some years

ago how one of the so-called Big Five accounting firms

has its brand name value disappeared overnight when it

has been found not stating the irregularities in the

audited account of one of the worlds largest

multi-national companies.

It is common to conduct the analysis at three levels. At

the top level, it is necessary to re-visit the Mission, Vision

and Value Proposition statements of the enterprise, and

clarify what values it wants to bring to its various

stakeholders. At the operational level, it is useful to

identify the various programmes of activities that the

enterprise pursues in order to deliver its intended values.

At the outcome level, it is sometimes useful to categorise

the various results in short, medium and long terms, and

find out how the enterprise is doing, as well as should be

doing. Needless to say, many senior executives find even

such an exercise extremely helpful in clarifying and

communicating their visions, as well as to understand

what has been missing from their enterprise.


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The next step is then to identify how the various

intellectual capital components contribute to the

performance and value of the enterprise at these three

levels. The framework of the 3 kinds of intellectual capital

has found to be very helpful here. Not only the actual

components of the intellectual capital are identified, but

it is also possible to see how these components interact to

create value for the enterprise.

At this point some enterprises cannot wait to tell the

world the values their companies stand for, and publish

reports that cover all their above findings. Alternatively

some companies may wish to publish reports to specific

groups of stakeholders, emphasising why the enterprises

should be their number one choice in achieving and

delivering the stated values.

Depending on the business situation of the enterprise,

some may choose to take a defensive stance and would

like to find out how they could protect their intellectual

capital. Some may be more aggressive in wanting to find

out how they can expand or diversify their business, and

in some extreme situations, may wish to embark on a new

business model altogether. Some examples of these are

given in the following chapters.


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Chapter 3

Intellectual Capital Management Applications

Consider the following scenario. You are running a

low-cost airline that flies short to medium flights. You

already have a customer base of a few million passengers

and are adding half a million more passengers a year. The

economic climate has just gone into a downturn and the

major airlines are now offering hefty discounts that

match your offerings. Customers are expecting even lower

airfares if they are to fly with you. Your operations are no

longer profitable and you wonder what needs to be done.


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20 Chapter 3 ICM Applications

You know you cannot compete with the major airlines on

financial nor physical assets, even though their low

airfare policy will not last for more than a year. Having

learned about intellectual capital management, you start

to analyse what you have:

Human Capital: You have your pilots and crew, ground

staff, maintenance people and your management team.

They are good but you have difficulties in attracting the

top talents because of your low-cost structure and image.

Structural Capital: Again you have good procedures,

corporate culture and your unique way of doing things.

Moving further in the direction of cost-cutting, however,

may be counter-productive.

Relational Capital: Nothing outstanding here except

your customer base. It has been growing at a rate much

faster than the competition. Can you capitalise (that is

turning this asset into money) on this?

One source of innovation is to look at what is happening

in other sectors of industry and see if it can be applied to

your own situation. You are fully aware that Google has

replaced Microsoft as the company with the highest

market capitalisation. The business model of an


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internet company is to secure as many eye balls as

possible through free services, and then charge other

parties for the access to these eye balls. Why not turn

your company into an internet airline and fly the

passengers free of charge, but charge them for anything

extra, and charge any interested parties for the access to

these passengers?

One airline has done exactly this during one of the

previous (not the present) downturn in economy. People

fly for free. Ticketing, if done online and with online

check-in without bags, can be as low as HK$40 for a one

and a half hour flight. Seats are free seating. Passengers

will have to pre-pay for the bags they want to check-in,

and the heavier the bags the more they have to pay. Bags

exceeding the prepaid limit will attract much higher fees.

Needless to say passengers will have to pay for the

refreshment on board, and without business class,

passengers can pre-pay for the express check-in service.

All the above transactions are priced on a cost-plus basis,

and although the profit for each transaction is quite small,

the profit to the company is still substantial when you are

talking about millions of passengers. The main income,

however, is from selling the Customer Capital to

interested parties. For instance, the airline asks the


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out-of-the-way airports to bid for the flights to land and

take off from there. After all, airports are in the business

of renting out spaces to aircraft maintenance companies,

catering companies, airline services companies and

shops. This airline would ask the airports: how much

would millions of passengers a year worth to you?

Similarly fast-food companies have to bid for the right to

sell their food on board, just like supermarkets would

charge for their premium shelf space in their stores.

The business model has now changed to capitalising the

Customer Capital of the airline, and this leads readily to

operational risk management. The main operational risk,

of course, is how can the airline ensure the customer

capital keeps growing? Having free flights would ensure

that the potential customer pool could be limitless. What

are the factors that would turn passengers away even

when the flights are basically for free?

The company has identified four main factors. They are

on-time flights, few flight cancellations, nearly no bag

losses, and being a clean and environmental friendly

airline. While it may be more cost effective to build such

an airline that is based on customer capital by

outsourcing everything except for the on-line ticketing

service, the airline choose instead to own its aircrafts, its


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pilot and crew and its maintenance team to make sure

that it can deliver the four key performance factors

identified above. In fact, it has a policy of not flying any

aircrafts that are more than 5 years old.

The results?

The airline expects to carry 66 million passengers in

2009/2010 and growing at 15% a year. Even during the

present financial tsunami, the company remains profitable

every year in the past years. You may wonder which airline

it is, but this is not important. The above analysis is neither

to promote this airline, nor to say that this is the best

business model for an airline. The analysis is just to show

how Intellectual Capital Management can help enterprises

renew themselves through innovation, how opportunities for

growth can be identified, and how the associated risks can

be managed. In such cases of enterprise renewal and

transformation, invariably the management has to develop

new structural capital that in turn needs to be support by

information technology. As no two companies would follow

the same path to enterprise renewal, there is no prescriptive

model as to how IT systems are to be deployed. It will be up

to the reader to propose and determine how IT can be

deployed in support of enterprise renewal and innovation.


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Innovation Management

For an enterprise to renew itself, it has to innovate either

its business model, ways of doing things, or its product or

service offerings, or all of the above. Many people agree

that without innovation, an enterprise cannot survive

under the present business environment. Many

consumer products would have product life cycles of no

more than 6 months (consider how soon your mobile

phone would have gone out of fashion); many service

companies have to come up with myriad of services just

to cater for the needs of their customers (think of the

number of insurance products on offer).


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Innovation should not be confused with invention or

Research and Development (R&D). The nature of

invention and R&D is to bring into being concepts or

things that do not exist before. Invention, on the other

hand, is to bring out new applications based on existing

technologies, or to deploy, in new areas, applications that

are originally developed for some other areas.

Why is innovation important? In a knowledge-based

economy, knowledge has become the prime raw resources

in every product or service on offer. A me-too product or

service has very little value. But how do you turn the raw

knowledge resources into economic value? Apparently

innovation is the main management process that adds

and extracts value from knowledge. And this is true

whether innovation is to find a way to do things

differently so as to improve internal productivity, or to

come up with new products or services.

The key operative word here is that innovation is a

process, and processes have to be managed. Again many

people confused innovation with creativity. Yet creativity

is just one of the steps of innovation. Studies have been

made to understand the process of new product

development (NPD), and a typical NPD process has the

following steps:


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Idea Generation,

Concept Development,

Feasibility Assessment,

Prototype or Pilot Demonstration,

Market Testing, and

Commercialisation

We may consider the case of cooking. Coming up with new

seasoning materials such as monosodium glutamate (MSG)

or breeding cattle in a special way to yield fillet of beef that has a

special flavour or texture can be the result of invention or R&D.

Combining different food preparation techniques, seasoning

ingredients, and ways of cooking to create new dishes would be

the result of innovation.

One can also visualise how intellectual capital management

could be applied to a restaurant, say. The ways of cutting or

grinding or smashing raw food are commonly known and can be

standardised. The same could be said of the ways of cooking

such as boil, steam, stir fry, deep fry and broil, etc, and the list of

seasoning. These could be standardised and become ones

structural capital. Who is good at preparing or cooking whichtype of food can also be documented and become ones human

capital. And which supplier can be relied upon to deliver fish,

meat or vegetable at which grade of quality would then form part

of the relational capital. Creating new dishes, or innovation, is

then a matter of combining the different structural, human and

relational capital to yield a desired result.


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Traditionally the NPD is the responsibility of the R&D

department. Using the ICM framework, it can be easily

seen that one can make use of the three kinds of

Intellectual Capital to help with each of the NPD process

steps. Technically, innovation can be outside the confines

of the R&D department. As enterprises are under

pressure to innovate, there are strong incentives to

involve as many parties as possible in innovation,

disregard of department and ranks within the enterprise,

and even involving outside stakeholders. This is process

commonly referred to as Open Innovation that can be

backed up by Web 2.0 technology.

Kermian Al-Ali was the first to apply intellectual capital

management to innovation management in 2003, proposing

that human capital and relational capital outside the R&D

department should be engaged in innovation (Comprehensive

Intellectual Capital Management: Step-by-Step, John Wiley &

Son, Inc. 2003). The first book on Open Innovation (HW

Chesbrough, Open Innovation: The New Imperative for

Creating and Profiting from Technology, Harvard Business

School Press, 2003) was published in the same year. In 2004,

Tim OReilly coined the phrase Web 2.0 during a brain

storming session in a conference on internet technology.


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ASML is a Dutch company making production equipment

for wafer fabrication, or the manufacture of integrated

circuits. ASML holds more than 52% shares of ASM

Pacific, a company making production equipment for the

packaging of integrated circuits that is publicly listed on

the main board of HKEx. One of the wafer fabrication

equipment is called the stepper. In 1990 ASML had less

than 10% of the market, while Canon and Nikon, both

from Japan, dominated the steppers business. Yet today

ASML controls 65%. How did they do it?

Starting in 1990, ASML considered itself to be too small

to compete directly with Nikon and Canon, with both

companies doing everything in-house. Instead, ASML

redesigned their products using a modular approach, and

farmed out the development and manufacture of these

modules to outside specialists. For instance, the

precision lens system was developed and made by Carl

Zeiss, a German company. Just focusing on system

design and integration, ASML was able to innovate faster

than the competition. ASML also took a more open

approach to maintenance. If a stepper breaks down, the

two Japanese companies would send an army of

engineers on site and put a tent over the equipment so

that nobody can see what they do. ASML would take the

opposite approach and showed customers the problem


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and how it could be fixed. In the process, it allowed ASML

to collect users feedback on many aspects of their

steppers that in turn spurred further innovation.

Intellectual Property Management

Intellectual property (IP) is usually associated with

patents. In the field of Intellectual Capital, besides

patents, IP also refers to trademarks, copyrights, trade

secrets and even brands (brand management will be

covered in one of the following sections).

Many companies in Hong Kong, large enterprises

included, tend to ignore IPs and their management

usually consider them irrelevant to their businesses. Yet

in these days of globalisation and knowledge-based

economies, one can easily infringe upon the intellectual

properties of others, even for OEM manufacturers.

Alternatively many companies miss out on the

opportunity to commercialise their intellectual properties

that may lead to the renewal of their businesses and

enterprises.


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A business has to take both the offensive and defensive

views towards the issue of infringement of IntellectualProperties. There are at least three strategies that one can

consider. They are Encirclement, Reinforcement and

Mapping. In the case of patents, Encirclement means

filing patents to barricade a major patent filed by one of

your competitors that could adversely impact your

business. The key is to file patents that improve uponyour competitors patent, or that extend the use of the

original patent in associated application areas. The

competitor will soon discover that it cannot make any

improvement nor apply it to new application areas

without infringing your patents. Encirclement, if

successful, would enhance your bargaining power inforging IP-based transactions with the market leader for a

cross-license agreement or even a joint venture.

Reinforcement is the strategy to pre-empt the competition

in encircling your primary patent. You develop a set of

supporting patents that represent improvement in


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technology or extension in application areas before your

competitors do so. Mapping is a strategy to search for

patent space that has not been occupied by the

competition. The aim is to create a new business area

using platform innovations that allows you to set the

rules of the game and define industrial standards.

These three strategies also apply to trademarks,

copyrights and trade secrets. In the cosmetic industry,

say, a company may map out a new business area in the

form of whitening products. It may choose to reinforce

this with a range of trademark products with different

degree of whitening or for different skin complexion, and

its competitors will certainly bring out their own similar

trademark whitening products in encirclement. The case

of copyrights is an interesting one. Copyrights protect the

ways ideas are expressed but not the ideas themselves.

Without copying the original text or visual images, one

can express the same ideas in another form in

Encirclement or in Reinforcement. Trade secrets are by

definition proprietary knowledge not made public.

Properly documented and dated, trade secrets may help

prove that you are not in infringement of your

competitors if yours predate your competitors patents. In

this respect, the three strategies of encirclement,

reinforcement and mapping also apply to trade secrets.


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Intellectual Properties can be commercialised by a

number of means, including technology transfer,

licensing, franchising, merchandising and copyrights

(publishing or digital rights). An enterprise may adopt a

passive, reactive or proactive stance towards

commercialisation of intellectual property rights,

depending on the nature and status of the IP. When the IP

is still under development and of little perceived value,

the company may wish to take a passive approach. When

the IP is fairly well developed but is considered to be of

core value to the business, the company may take a

reactive role and only consider commercialising it after

the company has reaped the main benefit from the IP, or

when forced to do so by market or government. A

company may take a proactive approach towards

commercialisation of its IP if it is considered to be

non-core to the companys business, or that some

application areas covered by the IP are unlikely to be

exploited by the company in the near term due to lack of

resources or other reasons.


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Branding Management

Branding is not simply the naming of a company or a

product. It is a battle for the mind of the consumers (Al

Ries and Jack Trout). It is about making and fulfilling

promises and winning consumers hearts. This is

particularly true in a knowledge-based economy, where

most products and services from different vendors are

very similar in terms of functionality, quality and price.

The emotional value conveyed by the brands is now the

final battleground where customers are won or lost.

Branding is important not only for products or services

that are sold directly to consumers, but also for B2B

businesses.

Again, the emotional value of a brand is not merely the

invention of a beautiful and power slogan. Which

emotional value to adopt has to be heavily researched,

selected, and designed into the products and service so as

to create the desired users experience. This calls for a

good capability to understand markets and target

customers. But which emotional value to adopt, and how

to create the necessary users experience would require a

good understanding and management of ones

intellectual capital.


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A professional service company has difficulties not in

creating sales enquiries, but in persuading their prospective

clients in accepting the level of their professional fees. Based

on ICM framework, the company comes up with a report on

their Intellectual Capital that not only states their mission,

vision and their organisational strengths, but also explains

their unique way of combining their various components of IC

in the creation of client values. In fact, the company develops

a set of computer templates that enables them to come up

with different versions of Intellectual Capital reports that

match the different value expectation of their clients. In

addition, the typical report contains a section on how the

company can still deliver excellent value to customers ascompared to the competition even when the business

environment has changed. The company has found that in

giving Intellectual Capital reports to their prospective clients,

in which the value creation and risk management processes

are described in some detail, saves them a lot of time and

resources in the price haggling exercises with theirprospective clients.


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Human Resources Management

Human Resources Management (HRM) is term introduced

into Hong Kong in the 1960s by American companies, and

has by now completely replaced the old British

terminology of Personnel Management or Personnel

Department. This is a move in the right direction,

signifying that people constitute one of the hidden wealth

that an enterprise can tap into to create business results.

Yet many companies still treat their human resources unit

as operational cost centres that exist just to ensure the

compliance with the Labour Ordinance. That some

companies have now called their HR function as Human

Capital Department has not changed the situation. HR

function is still considered operational and not strategic,

not one that can help create value for the company.

Intellectual Capital Management can provide the

framework and tools for HR people to work with senior

management on business issues from a strategic view

point, by releasing values from their human capital,

thereby generating more business results for their

companies. On the other hand, HR people can use

intellectual capital management defensively to help

enterprises to prevent the possible loss of skills,

knowledge and experience to limit operational risks.


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Traditionally HRM would approach the subject of

releasing hidden wealth from their staff members by

creating an attractive compensation scheme and a better

working environment and culture so that staff members

can become fired-up, enthusiastically contributing their

skills and talents to the creation of enterprise wealth.

This approach may gain some degree of acceptance in

enterprises that are managed by professional managers,

but to owner-bosses these HR initiatives will incur extra

costs without any quantifiable financial return.


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In one design house with more than 200 professional staff,

they have an issue in their compensation scheme and in

putting their staff to work in teams. All professional staff are

highly talented and artistic, with an artist-attitude to match.

Each professional staff considered themselves to be the best,

and wonder why some of their co-workers are paid more.

They also felt bitter that they are not assigned to some of theprojects that they prefer.

With the help of external consultants, the design house adopts

the intellectual capital management framework and evaluated

their human resources holistically, including what to remain in

people as human capital, what to put down as structural

capital (so that junior staff members can be trained and takeup these activities) and what relational capital they have and

what (including soft skill) need to be further developed. The

consultants help come up with a two dimensional matrix

consisting of a list of skill inventories with their corresponding

skill maturity levels. The human capital inventory is

computerized and staff can enter their profile and have it

reviewed by their peers, all done online. With the gradual

acceptance of the system, the design house can now channel

most of their energy and resources in serving their clients and

developing their business.


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The use of intellectual capital management can also help

HR to limit some of the operational risks associated with

people. For instance, an enterprise may suffer daily

losses in intellectual capital through staff retirement and

resignation, if nothing is done to arrest the situation.

Again, intellectual capital management can provide a

comprehensive framework for HR to come up with an

intellectual capital map, listing the various intellectual

capital components that are essential to an enterprise,

maybe even down to departmental or process levels.

Based on this intellectual capital map HR can then

develop various strategies in retaining the various

intellectual capital components with the enterprise.


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Chapter 4

Case Studies

Wallenius Wilhemsen Logistics

Wallenius Wilhemsen Logistics (WWL) is a Norwegian

company that positions itself as a provider of global

factory-to-dealer transport solutions for the automotive,

agricultural and construction equipment industries. The

company handles about 3 million vehicles and equipment

each year.


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40 Chapter 4 Case Studies

Long before 2004, the company noticed that the major

group of its customers, the automotive industry, was

getting more and more concerned about environmental

issues. The auto manufacturers not only started

researching and building green cars, they also began to

ask their suppliers questions about various

environmental issues. The logistics companies, being big

consumers of fossil fuel with heavy carbon emission, were

the main targets. WWL sensed that its automotive clients

could not claim to be green manufacturers even if they

could come up with green cars and manufacturing

processes with low emission, if the distribution channel

they used was polluting the environment. The logistics of

transporting the vehicles from factory to dealer would

have too big a carbon footprint.

WWL itself was also very environmental conscious, and it

also believed that being a green company could help it

gain more businesses from like-minded clients. So WWL

appointed a team leader knowledgeable in Intellectual

Capital Management to come up with a solution. After

studying the various intellectual capital, the team leader

believed WWL had sufficient operational knowledge to

specify the design of a zero-emission, ocean-going, roll-on

roll-off vessel for the transport of automotives. The team

leader also believed that the human and relational capital


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of WWL combined with the team leader would be

sufficient to assemble a design team of naval architects,

energy conservation specialists and designers to study

how a zero-emission vessel could be built. The concept

design work began in 2004 and has been completed. The

detailed design has been on going, with the target date of

2025 being the year of the launch of the vessel.

Scaled down models of the new vessel have been built

based on the conceptual design. This new vessel has met

three major design challenges:

1.The vessel should not use fossil fuel at all. It will bepowered by solar, wind and wave energy alone,

supported by a number of energy generators or

converters including fuel cell. The vessel will have zero

carbon emission.

2.The cargo capacity should not be sacrificed because ofenvironmental concerns. The conceptual design

comes up with a cargo hold of 85,000 m2, roughly the

size of 14 football fields and up to 50% more space

than modern car carriers.

3.The vessel should be friendly to the ocean. TheInternational Marine Organisation has identified the


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ballast water released by ships as one of the 4 major

threats to the worlds oceans. By adopting a special

hull design and doing away with stern propeller and

rudder, the new vessel has no need of ballast water.

With the construction of the model of the new vessel,

WWL has collected a total of 9 wins and nominations for a

broad range of environmental awards. The scaled models

also help WWL visualise its commitment to the

environment, demonstrating its capabilities in innovation

and management of complex projects. The scale models

also generated a lot of publicity that in dollar terms worth

more than the cost of the conceptual design. This

exercise helps the company to achieve a high public

profile, and as a result generate a number of new

business opportunities.


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Billerud

Billerud is a Swedish company providing packaging paper

and sustainable packaging solutions. The high quality

packaging paper is produced from primary fibres that

comes from controlled wood. Part of the wood supply

furthermore has its traceability certified according to

PEFC and FSC. One line of Billeruds product offering is

medical packaging paper, including those with microbial

barrier properties. This kind of paper has the ability to

withstand different sterilisation methods that the paper

has to be exposed to as medical packages, and after

sterilisation has the ability to guarantee the sterility of

the package right up to the time they are used.


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While Billerud manufactures high quality packaging

paper, the company is always looking into new

possibilities to increase the value of the company

offering. Therefore they commissioned a study, and with

reference to intellectual capital management, they found

that they can generate a higher value from their products

if they can assist their customers to come up with

innovative products and packaging that help their

customers to expand and accelerate business growth. For

example, with proper design and choice of materials,

paper boxes can be designed so that a box of fresh food

such as fresh tomatoes can be put on freight without

suffering any damages during transit due to packaging.

This can represent a cost saving of as much as 5%. In

addition, the paper material has good runability and

printability, so that the printed packaging materials can

be put on shelves and in shop windows directly without

being wrapped up in printed plastic bags. With the same

packaging used for transit and for display in shops,

Billerud is in a position to help its customers to meet the

increasingly stringent environmental regulations in

packaging now in force in many developed countries.


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Based on the intellectual capital management concept,

the study also reveals that potential customers need to be

taught how to make the best use of this new packaging

approach. In other words, new structural capital has to

be developed before the company can expand this

segment of the packaging market. A nine-step process for

the development from new product concept to packaged

product on the store shelf has been developed. This

structural capital typically can cut the time for a food

manufacturer to get a new product on store shelves from

1 2 years to 6 8 months. As this business does not

constitute the core business of paper making at Billerud,

a new company called Nine TPP (Total Packaging Partner)

AB has been formed as a joint venture with No Picnic, a

design company headquartered in Stockholm, Sweden.

One of Nine TPPs successful contributions was the

development of a special packaging for one of the worlds

largest mobile phone company based on Billeruds newly

launched packaging paper FibreForm. The new paper is

expected to challenge and replace plastic materials in a

number of applications.


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Printing Supplies

Printing Suppliers (not its real name) is a Hong Kong

based company founded in the early 1980s, making

consumables for printers. Its product range includes

cartridges for laser and inkjet printers, ribbon, copier

toner, ink, paper, parts, components and materials. This

consumable market has high gross margins, but is

dominated by the printer manufacturers and protected

by numerous patents. The management understands

that to remain in the market, they need to adopt an

aggressive patent strategy.

During the period of August 2004 to May 2005, the

company engaged a semi-government organisation to

train them in the use of TRIZ (Theory of Intensive Problem

Solving), a method that can enhance innovation, achieve

breakthroughs in product design and generate new

intellectual properties. At the end of this 10-month period,

the company filed 35 new patents that overcome

limitations imposed by the 200 patents held by the

competition. Also in 2004, the company introduced its

Product Development Management System. This system

helped the company to capture its inventiveness,

know-how and creativity and transform into unique,


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exclusive business assets that are further protected by

intellectual property rights. The system also helped the

company to explore, create, maintain and enforce its IP

rights.

By 2009, the company has registered more than 1,000

patents in China and other parts of the world. In 2008

alone, the company file patents at an average rate of

almost one patent every day. Its IP rights not only allowed

the company to gain market share through product

differentiation and entry into new markets, but also

enabled the company to enjoy additional income streams

in the form of royalty fees.


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InterQoS

InterQoS is a semiconductor IP company, a graduate of

the incubation scheme of the Hong Kong Science and

Technology Parks. Capitalising on the emerging market of

mobile multimedia, InterQoS has made breakthrough

innovation in the area of multi-core vector processing,

used to be found only in high-end workstation processors.

Its patent-pending digital signal processor (DSP) core,

called Victorus, is specially designed for the

next-generation mobile video gadgets such as Video iPod,

TV phone, etc.

The company is focusing on mass markets such as

mobile phones and netbooks. Taking an intellectual

capital management approach, it also realises that it can

branch out into other business areas by working with

suitable business partners. Therefore, it has, initially,

started to work with surveillance system design houses to

provide a turnkey solution for the wireless surveillance

market that is a niche market and does not have a

dominant chip provider. After establishing track record in

this market, InterQoS will finally move to the mass

consumer market.


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The Hong Kong Science and Technology Parks


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Chapter 5

Benefits of Intellectual Capital Management

Intellectual Capital Statements or Reports can help

companies, SMEs in particular, secure financial

investment. According to a European Commission (EC)

report on Reporting intellectual capital to augment

research, development and innovation in SMEs

(RICARDIS), when making assessments for funding,

SMEs often fail to articulate their intellectual capital and

how business values are created from their intellectual

capital. Instead, information tends to dwell solely on

financial accounts, not including innovation projects or

management methods. The report argues that this failure

to provide a full picture of business value is one reason

why SMEs find it difficult to raise finance or equity from

banks or investors. In one study of the EC, investors were

asked to generate forecasts for revenue and earnings for

an SME, and come up with their recommendations on the

company stock. The investors were divided into two

groups. One group was given the companys full annual

report, including the intellectual capital statement, while

the other group was provided with a version of the report

that excludes all non-financial information. The former


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52 Chapter 5 Benefits of ICM

group tends to come up with a lower forecast, but is more

likely to invest in the SMEs. The SME Agency of the

Japanese Government also reports that SMEs have

higher rate of success of obtaining financial backing from

their local banks if their applications are backed up by

intellectual capital reports.

The Japanese SME Agency also reports that SMEs find

their intellectual capital reports also help them to recruit

the right people for their jobs. As young graduates have

the tendency to seek employment from large enterprises,

SMEs that publish their intellectual capital reports are

better able to inform young graduates of the nature and

challenges of their businesses, thus enabling them to

compete for the right kind of talents to join their

companies.

Sometimes the intellectual capital report can also help

internal communication. Not everyone inside an

organisation is aware of the full range of intellectual

capital that it possesses. Even seldom can staff,

sometimes even senior staff, explain the ways in which

the enterprise create value for its stakeholders. A good

intellectual capital report can help employees to work in

synchronisation much better than the simple statements

on company mission and vision.


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54 Chapter 5 Benefits of ICM


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Chapter 6

Concluding Remarks

Skandia has coined the term futurize, to distinguish an

integrated, proactive perception of time from one that

resorts more to scenarios and plan than present action.

No one can predict what the future holds for us. Planning

for the future always has an element of uncertainty. It is

for this reason that the oil company Shell comes up with

the method of scenario planning. Scenario planning has

its limitations. It is an art in conjuring up scenarios that

may bear resemblances with future events. Instead of

scenario planning, one good attribute that can help with

the future is the sense. One simple example may

explain what is meant by sense. If you are travelling

from A to B, and if you get lost while you are on your way,

you can ask for directions from the local people. They

may tell you to turn left at the next junction, then go

straight for another mile and turn right and so on. If there

is no one around who knows the direction, in that

situation, you will find that it would be very helpful if you

have a sense of direction of where B, your destination, is.


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Chapter 6 Concluding Remarks 56

Direction is like your business plan of how you can

achieve your targets in the coming few months. Sense of

direction is what you would need in facing the future.

Knowing your intellectual capital AND how you can

create value from your intellectual capital is the sense of

direction that you need for facing the future. In

investment circles, people talk about business models.

Business models, however, is the result of carefully

designing and choosing the way various components of

intellectual capital are combined or multiplied to create

value. Some people like to collect business models like

they collect cooking recipes. Yet no two businesses are

the same, and you may not have the necessary

ingredients to execute the business model that you like. It

is your knowledge of your intellectual capital and your

skill in creating value from them that gives you

confidence in future. No matter what the future holds,

you will have the confidence that you can always generate

value from your intellectual capital.


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Documents

A Layman Guide to ICM