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  1. 1. Knowledge Management <ul><li>Dr. Randy M. Kaplan </li></ul>
  2. 2. Assessing the Value of Knowledge
  3. 3. Assessing the Value of Knowledge <ul><li>If we believe that knowledge represents an asset then we must have a way to assess that asset </li></ul><ul><li>This is especially true in the profit-making organizational sense where assets are considered a part of the organization’s value </li></ul>
  4. 4. Assessing the Value of Knowledge <ul><li>A long standing problem with the valuation of knowledge is exactly how value is applied to a particular constellation of knowledge </li></ul><ul><li>Since knowledge is not tangible it becomes a difficult entity to value and yet … </li></ul><ul><li>It is surely the case that without intellectual capital an organization would not be profitable </li></ul>
  5. 5. Assessing the Value of Knowledge <ul><li>Financial Models </li></ul><ul><ul><li>Provide a basis for a theory for an organization </li></ul></ul><ul><ul><li>Financial statements are the expression of the model </li></ul></ul><ul><ul><li>Only deals with the tangible assets of an organization </li></ul></ul>
  6. 6. Assessing the Value of Knowledge <ul><li>A key aspect of being able to assess the value of knowledge in an organization is to be able to identify intellectual capital in an organization </li></ul><ul><li>One popular approach to improving the performance of an organization is called business process re-engineering (BPR) </li></ul><ul><li>BPR was famous for saying “its not the people stupid.” </li></ul>
  7. 7. Assessing the Value of Knowledge <ul><li>The originator of BPR believed that if you could discover the underlying processes of an organization and, </li></ul><ul><li>if you could make these processes more efficient (a process like debugging), </li></ul><ul><li>then it would result in an organzation with significantly better performance </li></ul>
  8. 8. Assessing the Value of Knowledge <ul><li>An important aspect of BPR was that once you had the process, the people in particular roles could be interchanged </li></ul><ul><li>In other words, once you had the process the particular person offered no additional value to the process </li></ul>
  9. 9. Assessing the Value of Knowledge <ul><li>At the end of many BPR efforts it was found that organizational performance did not improve but actually became worse </li></ul><ul><li>10 years after BPR originated the originator discovered that people were in fact important to the process </li></ul>
  10. 10. Assessing the Value of Knowledge <ul><li>With the general decline of the re-engineered organization their needed to be a new theory of organization that included intangibles </li></ul><ul><li>This new theory of organization, one based on Kaplan’s and Norton’s Balanced Score Card gave KM practitioners the opening they needed to bring knowledge into the organizational picture </li></ul>
  11. 11. Balanced Score Card www.balancedscorecard.org
  12. 12. Balanced Score Card <ul><li>A response to the weaknesses and vagueness of previous management approaches </li></ul><ul><li>A clear prescription of what companies should measure in order to balance the financial perspective </li></ul>
  13. 13. Balanced Score Card <ul><li>From Kaplan and Norton, </li></ul><ul><ul><li>&quot;The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.&quot; </li></ul></ul>
  14. 14. Balanced Score Card <ul><li>Why is it about the Balanced Score Card that supports the idea of the valuation of knowledge? </li></ul><ul><li>If you consider the last part of the last sentence, </li></ul><ul><ul><li>investment in customers, suppliers, employees, processes, technology, and innovation. </li></ul></ul><ul><li>To invest in customers, suppliers and employers means to invest in knowing </li></ul>
  15. 15. Knowledge-Based Assets <ul><li>A theory of organization that takes knowledge into account </li></ul><ul><ul><li>can focus on the ease with which knowledge can be converted into products and services </li></ul></ul><ul><ul><li>provide value to the customers </li></ul></ul><ul><ul><ul><li>now, in the future </li></ul></ul></ul>
  16. 16. Knowledge-Based Assets <ul><li>Managing stakeholder relationships </li></ul><ul><ul><li>to improve the flow of knowledge </li></ul></ul><ul><ul><li>to create knowledge-based assets </li></ul></ul><ul><ul><li>to produce new products and services </li></ul></ul><ul><li>is a competence organizations must master </li></ul>
  17. 17. Definitions <ul><li>A. Asset </li></ul><ul><ul><li>1. A useful or valuable quality, person, or thing; an advantage or a resource. 2. A valuable item that is owned. … 4. assets. a. Accounting. The entries on a balance sheet showing all properties tangible and intangible and claims against others that may be applied directly or indirectly to cover liabilities of a person or business </li></ul></ul>
  18. 18. Definitions <ul><li>Asset (cont.) </li></ul><ul><ul><li>such as cash, stock, or goodwill </li></ul></ul>
  19. 19. Definitions <ul><li>Intellectual or Knowledge-Based Asset </li></ul><ul><ul><li>Anything valued without physical dimensions </li></ul></ul><ul><ul><li>Embedded in people </li></ul></ul><ul><ul><li>Derived from the processes, systems, and culture associated with an organization </li></ul></ul>
  20. 20. Definitions <ul><li>Intellectual or Knowledge-Based Asset </li></ul><ul><ul><li>Brands, individual knowledge, intellectual property, licenses, forms of organzational knowledge </li></ul></ul><ul><ul><ul><li>databases </li></ul></ul></ul><ul><ul><ul><li>process know-how </li></ul></ul></ul><ul><ul><ul><li>relationships </li></ul></ul></ul>
  21. 21. Definitions <ul><li>(Third Critical Concept) Capital </li></ul><ul><li>Wealth </li></ul><ul><ul><li>in the form of money or property </li></ul></ul><ul><ul><li>used or accumulated in a business by a person, partnership, or corporation </li></ul></ul><ul><ul><li>Material wealth used or available for use in the production of more wealth </li></ul></ul>
  22. 22. Definitions <ul><li>(Third Critical Concept) Capital </li></ul><ul><ul><li>Human resources considered in terms of their contributions to an economy </li></ul></ul><ul><ul><li>Accounting, the remaining assets of a business after all liabilities have been deducted; net worth </li></ul></ul>
  23. 23. Metrics <ul><li>In KM </li></ul><ul><ul><li>Metrics are in ther experimental stage </li></ul></ul><ul><ul><ul><li>here today, gone (or revised) tomorrow </li></ul></ul></ul><ul><ul><li>Characteristic can be concerting for measurement traditionalists </li></ul></ul><ul><ul><li>Not enough is known to share emerging practices </li></ul></ul>
  24. 24. Metrics <ul><li>Distinction between measurement and valuation not well understood by those who approach knowledge management from the human resources or information technology perspective </li></ul>
  25. 25. Metrics <ul><li>Same is not true for - </li></ul><ul><ul><li>financial analysts </li></ul></ul><ul><ul><li>intellectual property attorneys </li></ul></ul><ul><ul><li>economists </li></ul></ul><ul><ul><li>accountants </li></ul></ul>
  26. 26. Metrics <ul><li>For this group - </li></ul><ul><ul><li>Measurement monitors activity </li></ul></ul><ul><ul><li>Valuation places a monetary value on expected cash flow from an asset or a group of assets or which is expected to exist with some degree of probability </li></ul></ul>
  27. 27. Metrics <ul><li>Measurement </li></ul><ul><ul><li>Seeks to describe a particular organizational state by quantifying its inputs and outputs </li></ul></ul><ul><ul><li>Measurement has dominated the knowledge management assessment discussion to date </li></ul></ul>
  28. 28. Metrics <ul><li>Valuation has risen </li></ul><ul><ul><li>Because executives need to understand how KM translated into value for the organization </li></ul></ul><ul><ul><li>(otherwise why should the executive invest in KM?) </li></ul></ul>
  29. 29. Metrics <ul><li>Measurement </li></ul><ul><ul><li>Good at understanding the relationship between activity and operational outcomes </li></ul></ul><ul><ul><li>For example, effectiveness and efficiency </li></ul></ul><ul><li>It is not as good at relating effectiveness to and efficiency to financial outcomes </li></ul>
  30. 30. Metrics <ul><li>For a true science of KM measurement to develop the fields of valuation andf measurement must be combined to create a brand new discipline </li></ul>
  31. 31. KM Metrics Today <ul><li>Metrics that are in use today - </li></ul><ul><ul><li>Attempt to complete the picture of how well an organization builds, replenishes, or depletes its total asset base </li></ul></ul><ul><ul><li>Some of these metrics are familiar </li></ul></ul><ul><ul><ul><li>% of sales from new products </li></ul></ul></ul><ul><ul><ul><li>number of college graduates </li></ul></ul></ul>
  32. 32. Familiar Metrics <ul><ul><li>time to market </li></ul></ul><ul><ul><li>employee turnover </li></ul></ul>
  33. 33. Unfamiliar Metrics <ul><li>Others try to establish a new way to understand how well an organization creates and maintains the right knowledge-based assets </li></ul><ul><ul><li>return on people, rookie ratio, loyal customer percentage, number of ideas generated </li></ul></ul>
  34. 34. Unfamiliar Metrics <ul><li>Metrics collected from data are so-called hard metrics </li></ul><ul><li>Qualitative or so-called soft metrics have also begun to creep in as measurement criteria </li></ul><ul><li>Soft metrics have precedent in customer and employee satisfaction surveys </li></ul>
  35. 35. Unfamiliar Metrics <ul><li>KM Movement has extended the use of soft measures into such areas as - </li></ul><ul><ul><li>organizational capability, including, </li></ul></ul><ul><ul><ul><li>innovation potential </li></ul></ul></ul><ul><ul><ul><li>knowledge absorption capacity </li></ul></ul></ul>
  36. 36. Unfamiliar Metrics <ul><li>KM Movement also pushing limits of hard metrics </li></ul><ul><ul><li>For example - </li></ul></ul><ul><ul><ul><li>Determine the possibility of evaluating areas such as return on knowledge-based assets </li></ul></ul></ul>
  37. 37. Avery Dennison <ul><li>US-based adhesives and office supply products manufacturer </li></ul><ul><li>Metrics </li></ul><ul><ul><li>Cognitive capability </li></ul></ul><ul><ul><li>Human capital motivation </li></ul></ul><ul><li>Being used to determine the possibility of evaluating areas such as the the return on knowledge-based assets </li></ul><ul><li>wledge </li></ul>
  38. 38. Avery Dennison <ul><li>Metrics are communicated by combining soft metrics with hard metrics </li></ul><ul><li>These are presented visually in the form of spider maps </li></ul><ul><li>Mapping each project lets the organization create a comprehensive view of its entire development effort </li></ul>
  39. 39. Avery Dennison <ul><li>Spider Map </li></ul>
  40. 40. Avery Dennison <ul><li>In viewing projects in this way, overall strategic fit can be maximized </li></ul><ul><li>Strengths and weaknesses in its stock of knowledge-based assets can be uncovered </li></ul>
  41. 41. Economist’s View <ul><li>Knowledge-Based Assets </li></ul><ul><ul><li>If you go to a toy store to buy a board game for your child, you will most likely find your eyes glazing over as you scan a toy shelf loaded with similar board games within a fairly narrow price range </li></ul></ul>
  42. 42. Economist’s View <ul><li>Comparing Games </li></ul><ul><ul><li>Trying to pick a game involves running through a series of questions such as: </li></ul></ul><ul><ul><ul><li>How long will my child be interested in this game? </li></ul></ul></ul><ul><ul><ul><li>How many other members of this family can play this game too? </li></ul></ul></ul>
  43. 43. Economist’s View <ul><li>Comparing Games </li></ul><ul><ul><ul><li>Is this game more interesting than the game next to it? </li></ul></ul></ul><ul><li>At some pointyou make a decision about this game or the next game </li></ul>
  44. 44. Economist’s View <ul><li>Economist’s ask similar questions </li></ul><ul><ul><li>Their perspective is wider </li></ul></ul><ul><ul><ul><li>How did the board game get to the shelf in this store? </li></ul></ul></ul><ul><ul><ul><li>Why did the company choose to produce this board game? </li></ul></ul></ul>
  45. 45. Economist’s View <ul><li>Economist’s ask similar questions </li></ul><ul><ul><ul><li>Why did other companies choose to compete by offering other games on the shelf? </li></ul></ul></ul><ul><ul><ul><li>Why does it carry this price? </li></ul></ul></ul><ul><li>The answers to these questions help economists understand how people make choices </li></ul>
  46. 46. Economist’s View <ul><li>One of the largest considerations when asking these kinds of questions about knowledge-based assets as opposed to tangible assets is the creativity that must be used to find benchmarks </li></ul><ul><li>A computer chip is a kind of knowledge-based asset </li></ul><ul><li>If the computer chip reduces the cost of computing ... </li></ul>
  47. 47. Economist’s View <ul><li>If the computer chip reduces the cost of computing … </li></ul><ul><li>… benchmarks are hard to come by </li></ul><ul><li>The market for such an invention is harder to define </li></ul><ul><li>Comparables are harder to find </li></ul>
  48. 48. Accountant’s View <ul><li>Valuation does not present a problem when, </li></ul><ul><ul><li>an intellectual asset has been ‘bounded’ by a copyright, trademark, patent, or boundary </li></ul></ul>
  49. 49. Accountant’s View <ul><ul><li>Valuation is more complicated when a boundary has not been as well delineated as in cases like, </li></ul></ul><ul><ul><ul><li>workforce </li></ul></ul></ul><ul><ul><ul><li>company culture </li></ul></ul></ul><ul><ul><ul><li>business process know how </li></ul></ul></ul>
  50. 50. Accountant’s View <ul><li>This is not because we don’t have the valuation techniques </li></ul><ul><li>It is because the quality of data for ill-defined assets makes valuation much more suspect </li></ul><ul><li>Improving the quality of the input data is a very complex task </li></ul>
  51. 51. Accountant’s View <ul><li>Robust markets for certain types of intellectual assets do not exist </li></ul><ul><ul><li>Lack of a solid foundation for setting a price </li></ul></ul>
  52. 52. Accountant’s View <ul><li>For intellectual assets, performance metrics that monitor how management actions affect level, direction, and momentum are currently the best way to understand how intellectual assets impact business performance </li></ul><ul><li>Making a definitive link to business performance - the value link is challenging </li></ul>
  53. 53. Accountant’s View <ul><li>A problem with data collection </li></ul><ul><ul><li>Not enough organizations have been collecting sufficient information for </li></ul></ul><ul><ul><ul><li>long enough </li></ul></ul></ul><ul><ul><ul><li>on a consistent basis </li></ul></ul></ul><ul><ul><li>to perform vigorous analysis to determine which measures link to value creation </li></ul></ul>
  54. 54. Accountant’s View <ul><li>Three basic approaches are used to value assets </li></ul><ul><ul><li>cost, either historic or replacement </li></ul></ul><ul><ul><li>market price, the price at which an asset is traded </li></ul></ul><ul><ul><li>economic benefit, reflecting the revenues, costs and risks associated with commercializing an asset </li></ul></ul>
  55. 55. Brands <ul><li>Increasingly important part of a company’s asset base </li></ul><ul><li>Vital component of the company’s intellectual capital </li></ul><ul><li>A brand is a relationship between the company and its stakeholders </li></ul>
  56. 56. Brands <ul><li>The relationship is built on a foundation of - </li></ul><ul><ul><li>perceived and actual </li></ul></ul><ul><ul><ul><li>value of the company’s goods and services </li></ul></ul></ul><ul><ul><ul><li>cemented by effective communications </li></ul></ul></ul>
  57. 57. Brands <ul><li>Financial valuation of brands is important </li></ul><ul><ul><li>draws linkages between brand performance and its impact on long-term financial results </li></ul></ul><ul><ul><li>Without these results - </li></ul></ul><ul><ul><ul><li>Decision makers can’t make decisions about brands (decisions about investment) </li></ul></ul></ul>
  58. 58. Brands <ul><li>Economic Benefit Approach to the valuation of brands </li></ul><ul><ul><li>important advantage </li></ul></ul><ul><ul><li>offers brand owner a measurement </li></ul></ul><ul><ul><li>ongoing management mechanism </li></ul></ul><ul><ul><li>consider the brand on a par with other long term assets </li></ul></ul>
  59. 59. Capital Value <ul><li>The Capital Value of any business can be represented by the equation - </li></ul><ul><ul><li>Cci + Vci = Cvb, where, </li></ul></ul><ul><ul><li>Cci -> value of capital currently invested in the business </li></ul></ul><ul><ul><li>Vci -> value creation expected from the invested capital </li></ul></ul><ul><ul><li>Cvb -> capital value of business </li></ul></ul>
  60. 60. Brands <ul><li>Brands are part of the expected value creation (Vci) </li></ul><ul><li>Economic benefit of a brand </li></ul><ul><ul><li>Enhanced economic earnings </li></ul></ul><ul><ul><li>More secure economic earnings </li></ul></ul><ul><ul><li>Both of the above </li></ul></ul>
  61. 61. Measures <ul><li>Examples of Measures to Evaluate Intellectual Capital </li></ul>
  62. 62. Examples
  63. 63. Examples

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