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Chapter 4
Recognizing a Firm’s Intellectual Assets:
Moving beyond a Firm’s Tangible Resources........................... 108 (4-2)
The Central Role of Knowledge in Today’s Economy............................ 110 (4-5)
Human Capital: The Foundation of Intellectual Capital....................... 112 (4-6)
Attracting Human Capital................................................................................................ 114 (4-7)
Developing Human Capital............................................................................................. 116 (4-11)
Retaining Human Capital................................................................................................ 118 (4-15)
Enhancing Human Capital: Redefining Jobs and Managing Diversity.......................... 121 (4-19)
The Vital Role of Social Capital................................................................ 123 (4-20)
How Social Capital Helps Attract and Retain Talent...................................................... 124 (4-20)
Social Networks: Implications for Knowledge Management and Career Success.......... 124 (4-20)
The Potential Downside of Social Capital....................................................................... 129 (4-23)
Using Technology to Leverage Human Capital and Knowledge........... 131 (4-24)
Using Networks to Share Information............................................................................. 131 (4-24)
Electronic Teams: Using Technology to Enhance Collaboration.................................... 132 (4-25)
Codifying Knowledge for Competitive Advantage........................................................... 134 (4-25)
Protecting the Intellectual Assets of the Organization:
Intellectual Property and Dynamic Capabilities..................................... 135 (4-27)
Intellectual Property Rights............................................................................................. 136 (4-27)
Dynamic Capabilities....................................................................................................... 137 (4-27)
Issue for Debate.......................................................................................... 138 (4-27)
Reflecting on Career Implications............................................................ 139 (4-28)
Summary..................................................................................................... 139 (4-30)
Chapter 4
Recognizing a Firm’s Intellectual Assets:
Moving beyond a Firm’s Tangible Resources
Summary/Objectives
One of the key trends today is the emergence of the importance of the knowledge worker
in today’s economy. It is critical for managers to not only recognize the importance of top talent
but also the need to leverage human capital in order to innovate and, in the end, to develop
products and services that create value.
This chapter is divided into four sections.
1. The first section focuses on the increasing role of knowledge as the primary
means of wealth generation in today’s economy. After all, in the New Economy a
firm’s value is based much more on knowledge—know-how, and intellectual
assets—than on the traditional factors of production (i.e., labor and capital).
2. The second section addresses the key resource itself—human capital—the
foundation for the creation of intellectual capital. We explore ways in which the
organization can attract, develop, and retain human capital, as well as the
importance of recognizing the interdependence of these three activities. We also
address how the effectiveness of human capital can be increased by redefining
jobs and the value of a diverse work force.
3. Third, we discuss the critical role of social capital, that is, the network of
relationships among individuals. We address both social capital within
organizations as well as across organizations. We also discuss social networks—
and their implications for knowledge management and career success.
4. The final section focuses on the role of technology in leveraging human capital.
This can range from such basic technologies as email to more complex forms
such as sophisticated knowledge management systems. We also discuss how
technology can play a key role in electronic teams (or e-teams) and enhance the
retention of knowledge in an organization. And, we address the importance of
protecting an organization’s intellectual assets. Here, the roles of intellectual
property and dynamic capabilities become salient.
Lecture/Discussion Outline
We open the chapter in LEARNING FROM MISTAKES with the example of Bank of
America’s purchase of Merrill Lynch. Here, Bank of America mismanaged what might be
considered its most valuable asset—human capital—by promoting its cross-selling of BOA’s
products by Merrill Lynch’s financial advisors. Ask:
Discussion Question 1: What actions should Bank of America take to retain its top
investment advisors?
Response guidelines: The vignette suggests a number of sources of contention between Bank of
America policies and top investment advisors’ expectations. The problems were all associated
with cross-selling—or selling bank products, such as checking accounts, credit cards, and loans,
to investors who are clients of the investment advisors. Advisors did not want to share client
Students should be able to identify the problems that advisors had with the bank. One strategy
for retaining the advisors would be to simply remove as many of these problems as possible and
hope that the changes would improve the situation. Another strategy would be to engage in
Discussion Question 2: Can they do this while still leveraging value?
Response guidelines: Students should understand that leveraging value involves cross-selling the
bank’s products to advisors’ clients. It appears that Bank of America does not have the quality of
service that high-end clients prefer. So it appears that the bank would have to improve its
operations in this area. Other issues with advisors may need to be revised. For example:
Advisors may be allowed to offer special deals to clients who switch to Bank of America,
Advisors should be given the authority to remove some banking fees on behalf of clients.
In class discussions regarding these types of changes, students should be aware of some of the
possible impediments in Bank of America. Bank culture may not be accepting of the culture of
Discussion Question 3: Should they continue to cross-sell?
Response guidelines: Like many issues in strategy, class discussions could take the form of a
cost-benefit analysis. There is no right answer. The opening part of the vignette described some
The benefits of cross-selling include
The additional banking business from advisors’ clients
The costs of cross-selling may include
The loss of talented advisors who are not satisfied with the working relationship between
The reduced productivity of advisors and bankers from spending time and effort in cross-
The cost of changing organizational culture that would result from a blending of the
Students should note that these costs and benefits may be impossible to estimate in any numeric
sense. Also, the decisions have long-term impact. They are typical concerns of senior managers.
Epilogue: On April 5, 2013, a New York judge approved Bank of America’s $2.43 billion
settlement of a class-action lawsuit brought by shareholders over BOA’s acquisition of former
BOA still faces a fraud lawsuit that accuses the firm and former CEO Kenneth Lewis of
failing to disclose the Merrill losses and bonuses (BOA failed to tell shareholders it had
Source: Anonymous. 2013. Bank of America to settle suit for $2.4 billion. Dallas Morning News
(The Associated Press). April 6: 3D.
I. The Central Role of Knowledge in Today’s Economy
We begin by providing some figures on how wealth is increasingly dependent on
knowledge-based assets in today’s economy. The examples of Microsoft’s and Merck’s
knowledge assets are also given.
To provide some additional “quantitative support” for our arguments, we investigate the
tremendous “gaps” between market value and book value—a difference that is considered by
It is useful to pose the following question; it should elicit some interesting responses:
Discussion Question 4: What are the implications of EXHIBIT 4.1 for today’s
organizations?
We then define some of the basic concepts in the chapter:
Human capital is the “individual capabilities, knowledge, skills, and experience of
Social capital can be defined as “the network of relationships that individuals
Knowledge comes in two different forms: explicit (easily documented, stored,
It is important to point out that the creation of new knowledge involves the continual
interaction of explicit and tacit knowledge. We provide the example of engineers working on
The SUPPLEMENT below helps to reinforce the importance of top talent in today’s
Extra Example: Winning in the Knowledge Economy—The Importance of Core Competents
Talented executives will always be in demand and will be able to attract substantial salary and remuneration
packages. In effect, corporate power will be concentrated in the hands of the few. “What is critical in the firm of the
future is not so much the core competencies as the core competents,” predicts Jonas Ridderstrale, a professor at the
Stockholm School of Economics. “These walking monopolies will stay as long as the company can offer them
something that they want. When that is no longer the case, they will leave.”
Ridderstrale points to a growing array of supporting evidence. Bill Gates has reflected that if 20 of Microsoft’s key
people were to leave, the company would risk bankruptcy. In a study by the Corporate Leadership Council, a
computer firm recognized 100 “core competents” out of 16,000 employees; a software company had 10 out of
11,000; and a transportation group deemed 20 of its 33,000 employees as really critical.
Source: Crainer, S. & Dearlove, D. 1999. Death of executive talent. Management Review, July–August: 22.
Discussion Question 5: What are the career planning implications for you (that is, how
do students see themselves becoming core competents)?
The following SUPPLEMENT provides more insight into why human capital is
becoming more valuable in today’s knowledge economy.
Extra Example: The Growing Importance of Knowledge Workers in Today’s Economy
Intangible assets, primarily derived from human capital, have soared from 17 percent of the S+P’s market value in
1975 to 84 percent in 2015, according to the advisory firm Ocean Tomo. Even a manufacturer like Stryker gets 70
percent of its value from intangibles (it makes replacement knees, hips, and other joints loaded with intellectual
capital).
As technology takes over more of the fact-based, rules-based, left-brain skills of knowledge workers, employees
who excel at human relationships are emerging as the new “it” men and women. More and more major employers
are recognizing they need workers who are good at team building, collaboration, and cultural sensitivity, according
to global forecasting firm Oxford Economics. Other research shows the most effective teams are not those whose
members boast the highest IQs, but rather those whose members are most sensitive to the thoughts and feelings of
others.
Source: Colvin, G. 2015. Personal bests. Fortune, March 15: 106–110.
II. Human Capital: The Foundation of Intellectual Capital
Organizations must recruit talented people—employees at all levels with the proper set of
skills and capabilities coupled with the right values. In this section, we address the
We provide the rather humorous perspective of Professor Jeffrey Pfeffer (the San
Francisco law firm) to illustrate the interdependent nature of these three activities. It may be
useful to ask:
Discussion Question 6: Why do many firms devote more efforts to attracting human
capital than they do to developing or retaining talent?
STRATEGY SPOTLIGHT 4.1 discusses the importance of a firm’s “green” or
environmental sustainability strategy in attracting young talent. Ask:
Discussion Question 7: How important is a firm’s “green strategy” in your job search?
The SUPPLEMENT below presents the overall characteristics of the labor markets in the
United States, Japan, and France. The author argues that today’s college graduates would not
Extra Example: Labor Flexibility in the U.S., Japan, and France
The World Bank Group ranks the United States as “first” in the world in “employing workers” (that is, labor
flexibility). What puts the U.S. on the top of the list? American companies have a lot of freedom to hire and fire,
payroll taxes are relatively low by international standards, and people are free to move to new jobs when the
economy is better.
In contrast, Japan ranks 40th. Lifetime tenure at many companies remains the norm, and it is difficult to get a job
except immediately after leaving school. In France, which ranks 155th, many labor contracts severely limit hours and
flexibility, high payroll taxes fund workers’ benefits, and social policy makes layoffs very difficult. A strong
economy needs entrepreneurs to start companies and absorb new workers entering the labor market, and such risk-
takers do not appear in a vacuum: Such entrepreneurial activity flourishes typically only in countries with business
climates that are conducive to entrepreneurial efforts.
Source: Vanderkam, L. 2010. Why recession won’t mean lost generation Dallas Morning News. February 28: 5
Discussion Question 8: Do you agree with the idea that “higher labor flexibility eases
unemployment”?
Discussion Question 9: From the perspective of this article, would employees or
employers in the U.S. be happy that it is first in the rankings? Why?
A. Attracting Human Capital
We begin by questioning the traditional “lock and key” approach to employee selection
and emphasize the importance of employee mindsets, attitudes, and social skills. (It is useful to
The SUPPLEMENT below describes how a company’s capacity to attract the best and
brightest is enhanced by its reputation as a place that provides great opportunities for growth and
Extra Example: Attracting Human Capital through Establishing a Reputation
for Growth and Development
Some companies have a strong reputation as breeding grounds for top notch managerial talent. In addition to hiring
very competent people, these firms nurture and develop them through leadership training and careful mentoring. A
number of General Electric (GE) “alumni” currently occupy CEO positions in other companies. Other leading firms
such as PepsiCo and Procter & Gamble also have traditionally enjoyed similar reputations. In recent years,
companies such as Cisco, Campbell Soup, and Google have also established a reputation for their talented pool of
managers.
The concentration of high power talent, however, is not confined to North American firms. In a globalized economy,
the search for talent is becoming truly global. For example, the Indian software firm Infosys Technologies has been
“discovered” as a company with a deep reservoir of managerial talent. This innovative firm runs a 334-acre training
institute, even bigger than GE’s internationally known Crotonville (N.Y) education center. The company allows its
managers to spend a year at nongovernmental organizations to broaden their leadership skills. N.R. Narayana
Murthy, the company’s founder chairman calls himself the company’s “chief mentor.” It comes as no surprise that
headhunting firms now see Infosys as prime hunting ground. As many as half a dozen Infosys executives are now in
contention for CEO positions in other companies.
Source: McGregor, J. 2009. CEO breeding grounds: Looking beyond GE and P&G for talent. Bloomberg
Businessweek. April 11: 38.
Discussion Question 10: Mentoring and developing managers certainly make a company
a very attractive employer. But do you think this could become a double-edged sword if a
firm becomes the target for “poaching” by other firms?
1. “Hire for Attitude, Train for Skill”
This is a phrase that has become more predominant in today’s business environment. This
point is driven home with the example of Southwest Airlines. It may be interesting to pose the
following question:
Discussion Question 11: Do you think the approach used by Southwest Airlines is a good
idea? For other companies with which you are familiar?
We discuss the “Bozo filter” that Cooper Software, Inc. uses to screen employees.
Discussion Question 12: What are the advantages (and disadvantages) of the “Bozo
Filter”? Would it work in other organizations with which you are familiar?
The SUPPLEMENT below should be very useful to students—it should “personalize” some
of the discussion on the development and evaluation of human capital. It summarizes the four
Discussion Question 13: Can these qualities be developed or are they typically inherent
in an individual (i.e., a nature/nurture argument)? If so, how can they be developed and
nurtured?
Extra Example: Key Leadership Qualities for Future Leaders: Larry Bossidy
Below are the four key qualities that Larry Bossidy considers when evaluating job candidates:
THE ABILITY TO EXECUTE: Ideas, analytical capacity, and education are important parts of a leader’s makeup.
However, just as important is being able to implement those ideas. There are people who are fulfilled by expressing
big thoughts, but you will be better served by hiring people with boundless energy who can execute the thoughts.
A CAREER RUNWAY: Good leaders have plenty of runway left in their careers. I like to hire someone for this job
and also the next job, never for the person’s final position. People with perspective on their jobs give me an
indication that they have not only the interest but also the ability to go further.
A TEAM ORIENTATION: If someone is able to work through and with other people, he’s got better potential then if
he is essentially an individual contributor.
MULTIPLE EXPERIENCES: I’ve learned to consider carefully the dynamics of a candidate’s past work
experiences. People who come from quasi-monopolistic areas often have great difficulty moving into more
competitive environments. You have to understand the environment from which you’re hiring; some kinds of
companies are better than others at developing leaders. To make sure our future leaders have the right experience, I
look for candidates who have operated real Profit & Loss units in two or three different industries or companies.
That’s how great leaders are grown.
Source: Bossidy, L. 2001. The job of the CEO. Harvard Business Review, 79 (3): 47–49.
Teaching Tip: The adage “hire for attitude, train for skill” can generate some interesting
discussion in the class. Some students may argue that in jobs that require high levels of
skill, such as software development, skills may be more important than attitude. This may
2. Sound Recruiting Approaches and Networking
We address the recruiting challenges of Google and GE Medical Systems. Clearly, such
firms go to great lengths to hire the “best and brightest” in their industry.
Many companies have found out that their most effective recruiting efforts start closest to
Discussion Question 14: What are the advantages of such incentive programs to provide
referrals? Are they done at companies with which you are familiar? Should they be
implemented?
3. Attracting Millennials
We discuss some of the “best practices” that companies are using to attract “Generation
Y” or “Echo Boom” employees. These include people born after 1982. Many Y-Generation
In might be interesting (and admittedly! a risk) to present an alternate perspective in class
Extra Example: Generation Y—A Less Flattering Perspective . . .
Upon graduation, it turns out that a lot of Generation Yers hadn’t learned much about struggle or sacrifice. As the
first of them began to graduate from college in the late 1990s, the average educational debt soared to $19,000 for
new graduates, and many Yers went to the only place they know they’d be safe: home. Lots haven’t left. A survey of
college graduates from 2000 to 2006 by Experience Inc. found that 58 percent of those polled had moved home after
school and that 32 percent stayed more than a year. Even among those who’ve managed to stay away, Pew found
that 73 percent of 18- to 25-year-olds have received financial assistance from their parents in the past year, and 64
percent have even gotten help with errands.
Source: Hira, N.A. 2007. You raised them, now manage them. Fortune. May 28: 38–46.
Discussion Question 15: Do you think that Yers might have expectations that are
unrealistic? If so, what has led to such expectations?
Discussion Question 16: What should potential employers do? (e.g., provide more
“realistic” job previews?)
The following SUPPLEMENT helps us understand how Google attracts talent and human
capital through financial and non-financial incentives. Google not only offers benefits and
Extra Example: What Makes Google so Great to Work For?
Google Inc., the research giant of our time, ranks first of the Best Companies to Work For by Fortune Magazine in
2011 and has been in the top three ever since. So what makes Google such a great place to work?
Great workplace atmosphere and the unique “Google Culture” seem to set Google apart from over 440 companies
competing for spots on this year’s ranking of the nation’s best employers. Google staff, or Googlers, are everything
to the company as it commits to encourage innovation. Googlers do not merely work but have a great time at work.
Extraordinary perks offered by Google to its employees help build a great workplace. The headquarters, in Mountain
View, CA, includes on site medical and dental facilities, oil change and bike repair, foosball, pool tables, volleyball
courts, assorted video games, pianos, ping pong tables, and gyms that offer yoga and dance classes, free washers and
dryers, and free breakfast, lunch, and dinner on a daily basis at 11 gourmet restaurants. Googlers have access to
training programs and receive tuition reimbursement while they take a leave of absence to pursue higher education.
As Google states in its own website, “though Google has grown a lot since it opened in 1998, we still maintain a
small company feel.” This “small” company continues to not only roll out new and innovative products, but also
attract the best talent.
Source: Anonymous. 2011. Best companies to work for 2011. www.finance.yahoo.com. January 20: np.
Discussion Question 17: Are you aware of other companies using non-financial
incentives to attract young talent in the industry?
Discussion Question 18: Are the costs paid by Google to keep its employees happy too
high? What does the company get in return? How much are happy employees worth?
Discussion Question 19: If this strategy works well for Google, why don’t more
companies implement it?
