Opportunities and Diversification - Expansion of Business by Analyzing the Structural Capital of Engineering Service Firms

Masterarbeit von Roberto Cabezas

Introduction:

The future of many firms in the aerospace sector is uncertain. Factors like the financial crisis have made the industry unstable. Companies that are unable to adapt to different markets have difficulties to survive. Hence, engineering products nowadays demand to acquire a knowledge-based perspective of work like ‘peer production’ or ‘mass collaboration’, to promote open management standards and to focus on services with more value-added, which means that companies need to reeducate itself and to make constant investments in intangible resources.

Furthermore, the new competitive landscape [ ] demands that companies are aware of emerging driving forces like globalization, more sophisticated customers and competitors, increased technological capabilities, shortening of product life cycles and diversification. These issues emphasize the demand of flexibility and speed in responding to fast-changing environments.

In addition, one of the biggest problems that the firm where I worked for one and a half year, and to which this study is dedicated, are facing is the asymmetrical changes affecting service markets. This firm turned from being highly competitive, based in quality management and technical expertise to be unable to deploy its expertise in other segments. Many competitors acknowledged earlier that the market is changing and achieved to seize a better position. Consequently, the firm was prejudiced.

This master thesis aims to build a framework for a systematic assess of professional service markets, using the engineering approach of Bornemann and Reinhardt. It is based on the theory of the structural capital and a strategic process to appropriate required capabilities in the target markets. At the present, what this company lacks are not the physical resources or technical competences, but capabilities that enable the firm to leverage new competences to address new markets.

Service industries, including engineering services providers (hereafter ESP), have the particularity that the ‘core competences’ and the ‘critical success factors’ are based on intangible assets. Hence, this thesis shall contribute to a development of a strategic view of intangibles. Building this framework will help managers to understand the process of developing and formulating an effective strategy, which meets the industry demands, and consequently, it will show how to react to new business paradigms.

As a starting point it can be stated, that the managers of this firm have not been aware that every segment of an engineering service provider has its requirements in a context of knowledge management. This fact illustrates the first insight about the necessity of this thesis to research the structural capital because of its essential role in the engineering service industry. A knowledge strategy can only be deployed and articulated by developing an effective structural capital policy. Hence, in this study the structural capital is the main object of investigation.

The project ends with a concrete proposal about management mechanisms to execute the model, a discussion of the implications and important issues to consider, as well as a review of the developed ‘leadership model’. Finally, this project aims to show the emerging business paradigm that drives the current evolution of the strategic management disciplines.

The main objective of this work is to create a framework and tool that helps managers to enhance the understanding of how the intellectual capital impacts the ESP sector, and thus to assess the potentials of new markets. In order to achieve this, a research model has been developed based on the theoretical framework built in the chapter 3 and the performance drivers explained in chapters 4 and 5. In addition, the model can be used to clarify the core capabilities or competency areas, patterns of working structure, firm culture, platforms methods other assets of target companies. Analyzing the intellectual capital should be a major issue before entering a new market. By benchmarking the structural capital, managers will understand which capabilities have to be raised or improved before appointing a call for tender. Furthermore, having achieved this assessment of structural capital, and similar analysis of human and relational capital, the company will gain expertise in the following areas:

• Predictability of performance.

• Systematic decision making.

• Effective control of intangibles.

• Connecting intangible assets reporting with financial reporting practices.

Table of Content:

Text Sample:

Chapter 4.2, State of the Art in Intangible Asset Research and Reporting:

There are several approaches to manage intellectual capital actively. In addition, Bornemann and Alwert suggest that by integrating knowledge workers into the decision making process, an appropriate organizational structure that support an effective and efficient deployment of intangibles can be achieved. Established instruments encompass the following areas:

• Development of knowledge strategies.

• Intellectual capital reports.

• Various others from knowledge management which improve internal communication as the main means of corporate integration as well as alignment.

Regarding the last point, the German ‘Wissensbilanz’ method proposes the most pragmatic approach, encompassing following main areas: IC business model, IC process flow and IC potentials portfolio. Primarily, the German approach is used as a tool to improve the systematic process of an organization’s intellectual capital management. This gives a platform for management to prioritize activities from a cost/benefit approach for the firm’s future earnings potential. It visualizes systemic interrelationships as a process flow of contextually refined key IC components into an intelligence map.

Furthermore, recent research on components of intellectual capital has facilitated the understanding of the linkage between resources allocated into specific areas of intellectual capital and business performance. Increasing evidence has been revealed on the importance of investments in intellectual capital to sustain business growth.

The challenge of most knowledge driven and knowledge intensive corporations are facing today is the transformation of the human capital into reusable structural capital. System support is not the only challenge anymore; it’s the internal culture and leadership that separate the winners from the losers. The impact of these transformations on value creation can be assessed and visualized through the intellectual capital approach with a ‘Navigator’, a model revealing all the value-creating resources (tangible and intangible), their transformations, and the relative importance of the resources and transformations for value creation.

In addition, different intellectual capital models developed try to articulate the link between knowledge assets and business performance. The majority of them provide an effective high-level taxonomy of intangibles, which primarily anchor around three components: human capital (HC), structural capital (SC) and customer capital (CC).

For this purpose, Ordonez de Pablos developed a practical guideline to support the measurement and reporting of intellectual capital. In the report, the development of intellectual capital statements was proposed; these intellectual capital statements should be composed of an intellectual capital report, an intellectual capital flow report and an intellectual capital memo report in order to facilitate formal reporting to the stakeholders.

On one hand, IC reporting creates a holistic image of firm’s hidden value, contributes to the formation of a more detailed picture of the organization, but on the other hand, an IC Report does not show the Business Model of company. Furthermore, a major drawback of all developed intellectual capital reports is their non-comparability due to the diversity of conceptions. Thus, it is not possible to compare and evaluate the results of different firms within an industry using diverse concepts of intellectual capital reports.

Research and development expenditures demonstrate the amount of new resources allocated to generate new intellectual capital for technology-based companies. Such research and development expenditures would enable a firm to develop new products and patents as well as the technological know-how that could create competitive advantage for a company, as advocated in the resource-based view. In the case of wireless application firms, the structural capital alone demonstrates a significant impact on revenues generated by these companies. Human capital, inclusive of resources for general and administrative activities, also demonstrated predictability for revenues generated in the respective years. However, its influence was found to be less than that of the structural capital.

Infrastructure (structural) assets are those technologies, methodologies and processes that enable the organization to function. Examples include methodologies for assessing risk, methods of managing a sales force, databases of information on the market or customers and communication systems such as e-mail and teleconferencing systems. Basically, all elements that make up the way the organization works. Such elements are peculiar to each business, and their value to the organization can only be attained by assessment within the target organization.

Research focusing on the architectural or integrative capabilities of firms can offer ‘insights into the source of enduring differences in firm performance and highlights the importance of exploring the sources of structural capital’.

In the case of Germany, a project was carried out at the Fraunhofer Institute in Berlin with the cooperation of small and medium-sized companies (SME). The aim of the project was to show how these SMEs utilize their intellectual capital (Wissenskapital), as their process-oriented perspective of business growth. The prime target was to raise systematic understanding of where the IC of those SMEs lies and how to evaluate it. The authors state that German companies need to better understand the internally ‘hidden’ assets, i.e. the competences that are not visible on the financial balance sheet. Competition in Germany is tough for ESP firms. They must develop a completely understanding of their intangible assets and capabilities.

‘Since investments in intangible assets in most of the attractive business sectors is now more than 50 per cent, they wish to have more transparency on what these investments bring to the company’s value and their impact on financial results’.