Critical issues of intellectual capital theory in transitional countries

The relation between resource based view and intellectual capital theory

The resource-based view (RBV) of a firm has been developed for over 30 years. During this time, it has been both widely taken up and subjected to criticism. The core idea of RBV is that if a firm is to achieve a state of competitive advantage and positive organizational outcomes it must acquire and control valuable, rare, inimitable, non-substitutable resources, and capabilities both tangible and intangible, plus have the organization in place that can absorb and apply them (Barney 2001).

To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile (Barney 2001). Thus, the resource and value, and the narrow conceptualization of a firm’s competitive advantage are the basic concepts of the RBV (Kraaijenbrink 2009). Within the RBV, the strategic reference point shifted from the external to the internal. As opposed to the industry-based view, proposed by Porter (1981), the firm itself became the main subject of investigation. In the long run, competitiveness is derived from the ability to build a Core Competence at lower cost and more speedily than competitors. This proposition is shared by several related analyses including knowledge-based view (KBV).

Starting in the 1980s, RBV has developed and gained influence in the strategic management and international business literature. Wernerfelt (1984) was the first, who looked at firms in terms of their resources rather than in terms of their products. Later, valuable contributions to theory for developed markets were made by a number of scholars (Barney 2001; Peteraf 1993; Conner and Prahalad 1996; Helfat and Peteraf 2003; Amit and Schoemaker 1993).

Research on emerging economies has broadened and deepened the RBV (Martín-de Castro et al. 2013; Hoskisson et al. 2013).

However, being widely adopted by strategic researches, some critics of its basic foundations exist (Kraaijenbrink 2009; Thorpe et al. 2005; Priem et al. 2013). For example, Kraaijenbrink (2009) claims that placing its focus on the resource as the firm’s basic component and its narrow view of firms as a bundle of these resources, the RBV is explicitly reductionist and stands against holistic theories. Thorpe et al. (2005) considers it unsuitable to explain the emergence of a competitive advantage in dynamic markets. Priem et al. (2013) raise questions about RBV legitimacy as a theory as it is extremely difficult to parameterize and to test empirically its basic axioms without measuring intangible assets in some detail.

The KBV as an extension of RBV focuses on the value of intangible assets and suggests that knowledge is critical to a firm’s long-term success. The current evolving economy characterized by the new technologies, the globalization, and an ever-increasing emphasis on intangible services (Barney 2001; Grant 1996). Taking this perspective, performance differs between organizations by addressing asymmetries in knowledge as a foundation (Amit and Schoemaker 1993; Conner and Prahalad 1996). Thus, firm’s performance is significantly enhanced when the strategy includes acquiring and managing knowledge-based resources by accumulating and processing it to enable organizational learning. KBV explains the existence, growth, evolution, and internal organization of the firm taking as a key point available knowledge. According to KBV, strategic decisions of local firms are shaped by the cognitive capabilities of their managers. The propensity of firms to explore and acquire new knowledge is influenced by the exposure to diverse external sources of knowledge. Quast (2012) suggests three main reasons for efficient management of knowledge of the organization. First of all, it helps to strengthen decision-making capabilities. Explicit database provides managers with information for high quality decisions. It means that knowledge management facilitates more informed decisions. Overall, these works show that firms that build their strategies on path dependent, causally ambiguous, socially complex, and intangible assets outperform firms that build their strategies only on tangible assets (Barney 2001).

Another powerful stream that emerged in the strategic literature was the perspective of intellectual capital, or the efforts to identify and measure the assets, resources, and capabilities of intangible nature, which are a source of competitive advantage of the firm (Martín-de Castro et al. 2013). In the late 1990s, the need for systematic measurement, management, and representation of intangible assets were articulated in the Western literature. Since then, knowledge has been considered a key valuable resource for organizations; and the substantial literature on IC measurement, management, and reporting has emerged (Bukh and Johanson 2003; Edvinsson and Malone 1997; Roos et al. 2012; Sveiby 2003) including a number of IC frameworks (Sveiby 2003).

IC is considered to be the key driver of innovation capacity (Bhuiyan 2011; Bukh and Johanson 2003; Cabrita and Bontis 2008; Roos et al. 2012; Sveiby 2003), which have a strong impact on productivity of firms (Sveiby 2003). As innovative firms are financially more robust and generate higher employment; management of IC is a key determinant of future firm performance.

The concept of IC was developed to evaluate and manage organizational knowledge (Petty and Guthrie 2000; Roos et al. 2012; Stewart and Ruckdeschel 1998; Sveiby 2003). Edvinsson and Malone (1997) broadly defined IC as“…the sum of a company’s intangible resources (including knowledge, technology, brand reputation)”. However, recently scholars have shown (Bukh and Johanson 2003; Roos et al. 2012) that IC includes both tangible and intangible components. One current definition of IC is “… non-monetary and non-physical resources that are fully or partly controlled by the organization and that contribute to the organization value creation…” (Roos et al. 2012). IC is considered to be tri-partite, including relational, organizational (structural), and human capital.

Kazakhstani firms strategies

Since past decade Kazakhstan’s economy has been considered emerging (Hoskisson et al. 2013; Bruton et al. 2008; Kholjigitov 2013; Knoop 2013). Kazakhstan, as a former Soviet Union country with low institutional development and high infrastructure and factor development is considered as mid-range emerging economy (Hoskisson et al. 2013). Although taking into consideration social and political peculiarities of the local market, the Kazakhstani firms develop their strategies based on the principles of survival and development in emerging economy.

The radical changes in economic and political situation as well as strategic course of innovative development for the State had forced newly formed companies to seek ways to survive and prosper in the current market conditions. Domestic firms in Kazakhstan face rapid political, economic, technological, and institutional changes. These environmental uncertainties create the necessity for upgrading and re-configuring the existing resources and capabilities. The Kazakhstani firms facing the same situation as many others at post-soviet space took different approaches to survive and compete. In the global market economy where the prices of goods and services are determined in a free price system force companies to take managerial decisions not only on what to produce, but also how to produce it in more efficient manner. This is totally contrasted with the state-directed or planned economy with the state owned enterprises and the prices being set by the government when business needs not to be sophisticate as it was compensated by government for loss.

The standpoint of the work (Medved et al. 2011), which discusses the issues of transition of managerial approaches from planned economy methods to market based principles in the company’s previously being state owned, is based on belief that this transition is a multidimensional task. It must include the following dimensions: legal—changing pattern of ownership, financial—capital restructuring, product and service portfolio restructuring, organizational restructuring, and developing new operational methods.

While most Kazakh companies coped with the first three issues during past 10 years the last one is still being a challenge. This issue is connected with the fact that while legal and financial restructuring requires government and company’s board decisions made at higher management levels, the organizational and operational restructuring involving a large number of employees require introduction of new methods and technologies. Here, it is really important to mention that none of these improvements would work properly without changing people’s mind at all organizational levels and building new forms of relationships, including organizational restructuring and changing decision making patterns. Moreover, according to Savitt (1998) this issue is the dimension where strategy should be developed and implemented.

Some works devoted to organizational changes (Beer and Mike 2013; Briner et al. 2012; Knox 2008) provide frameworks for types and strategies of organizational changes. For example, Knox (2008) discussing the challenges of management changes in Kazakhstan, consider organizational “archetypes”, which include the formal structure of the organization; systems of decision making; underlying interpretive schemas (core values, beliefs, and ideology), and argue, that changes should occur simultaneously in all three dimensions. From this perspective, we could assert that the organizational changes in Kazakh companies are distorted toward the first objective of formal restructuring, while the last two still require measures taken. Non-profit organization’s strategy was studied by Kabdiyeva (2013), Alymkulova and Seipulnik (2005). The ways of promoting innovations and compensating for missing elements in the technology-based infrastructure and environment through techno parks establishment in Kazakhstan were discussed by Radosevic and Myrzakhmet (2009), Bogko (2012). Ismail et al. (2013) studied the relationship among managerial ties, strategic initiatives, and firm performance in emerging economies, including Kazakhstan.

While, a wide body of the literature supported by successful practical examples has been presented to help western companies embrace the complex process of managing their IC, not many studies have been conducted for emerging and developing economies (Kiessling et al. 2009; Ireland and Webb 2009; Andekina and Medeni 2013; Bhasin 2012). Even less evidence is found for the Commonwealth of Independent States (CIS) region. The focus of the previous Russian publications concerned with knowledge management and intellectual resources theory has been developed through the perception of knowledge as the input for research and development achievements. Thus, the object of research was to articulate the “IC—scientific-industrial progress” chain as an “input–output” model, whereas the procedure of transformation—the “how”, was neglected. These models included: communication aspects, which covered the processes of information and knowledge transfer, mainly through technical decisions of information technologies; financial aspects, which accounted investments in science; and legal aspects, which encompassed the issues related to the rights of intellectual property. Therefore, such models had obvious drawbacks as they: represented a static and deterministic picture of knowledge assets; put emphasis on quantitative rather than qualitative aspect of knowledge; did not take into consideration intangible attributes of the IC; and did not provide obvious linkage between their components.

The current research shows that in spite of the fact that CIS researchers currently articulate the IC role in an organizational development process (Illyashenko and Shypulina 2013; Andreeva and Kianto 2012; Kianto et al. 2013; Andekina and Medeni 2013), and the practical evidence shows that it is in an infancy stage.

Not much research found on application of KBV or IC to evaluate and manage intangible assets and knowledge management process in Kazakh companies. Griffith et al. (2001) studied the strategy of international joint ventures (IJV) in terms of the issues of knowledge transfer between foreign and local partners in Kazakhstan and indicate that transfer of knowledge, which is considered a resource-based asset is a key for IJV success. Andekina and Medeni (2013) explore the efficiency and importance of knowledge management for business entities, and claim to provide benchmark of best practices for Kazakhstan, providing a model of a knowledge-based organization. Authors also highlight that if knowledge is not saved, recorded, and shared firms are more likely not to achieve their targeted productivity, because knowledge in all firms is people-based. Nevertheless, in some entities there is a scarcity of concepts and tools for managing these intangible assets in a systemic and an efficient way (Andekina and Medeni 2013). Dyker (2005) studying dynamic competitiveness of Kazakh firms found that historically conditioned tendency to isolation weaken this capability and excludes networking as it operates in the advanced industrial economies. In spite of the fact that the role of human capital is generally recognized in Kazakhstani companies, public policy in this area is perceived as being highly ineffective, in a situation where the companies themselves do not have sufficient resources to fund all the training they need.

Thus, recognizing the need for evaluating and managing intangible assets of the mining company at this stage of transition, the use of IC theory was chosen to facilitate this.

The research site and the problem

The mining company operates in the North Kazakhstan, and the mineral deposit is projected to last for 70 years. The company was established in 1965 and during Soviet Union period was state owned; in 1997, the company was privatized as most of others after Kazakhstan’s independence. As a result of open sales the proprietor of the group of enterprises became a national investor. Currently, the mineral production of the company is supplied to more than 20 countries around the world. The capacity of the plant is sufficient to produce about 400.000 ton of mineral product annually and the number of employees is ~3,500. The company was acknowledged with international awards; ISO certified, mechanized, and automated.

During preliminary research, the targeted mining company was found conservative and resistant to changes. The reasons for this were peculiarities of historically determined mining business: the size of the company is relatively large; hierarchical structure and functional management are used; and clients are not sophisticated enough, in comparison with goods manufacturing companies. All of these features perfectly fit definition of a “mechanistic” organizations, which is considered in the business western literature out dated and ineffective. The traditional approach to mining management, which is strong hierarchical and non-flexible, emanates from the Soviet Union’s hierarchical planned systems and is still performed through the CEO approving long-term, medium and short-term pit development plans, which are usually weakly related to the market demand (Tsekhovoy and Statsenko 2010). In emergent market economy, these traditional organizational structures and management practices largely geared to the mass production of ore of a certain quality for stable federal orders which are not adequate as they do not provide aligning the operational activity with the organizational strategy of the mining company. Moreover, the current situation has shown that the top leadership of the mining company do not fully realizes the necessity of systemic organizational change, trying to cope with significant challenges by means of backfired approaches such as cost cutting and staff reduction strategies.

Resource assessment

The company defined itself as a typical value chain, therefore, monetary and physical resources were considered as most valuable after the first iteration. A summary of the organizational resources is shown in the Appendix Table 1.

Organizational capital

A snapshot of the current simplified management model of the company is presented in Fig. 1.

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The analysis revealed that the organizational capital needs the most initiatives to be put in practice as sufficient improvements are required. Although, operational activity was standardized by ISO 9001 specifications, project activity was not standardized. No structured process existed for the recording lessons learned, and the level of innovation was low. The company's performance measurement system included only financial and technological indicators, and there was no evidence of measuring intangible assets (see Fig. 2).

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Organizational structure was hierarchical and rigid; there were problems with coordination between departments. Firstly, functional management “perceives the narrow picture from the perspective of silos”. Secondly, there was a lack of “common language” among the functional silos. All the initiatives were perceived in different ways, which impeded the coordinated accomplishment of tasks set. The third problem was low trust among the employees to the top management decisions and between departments as well, which caused reluctance to change and low involvement with new initiatives.

Performance measurement and management system development

The learning and growth perspective as the ground of strategic map was developed, taking into consideration available resources. This trajectory encompasses the two strategic theories, Porter’s (1981) competitiveness approach and resource- based view.

The first step taken by focus groups was developing the key strategic documents—mission, vision, values, and strategy of the company. Participants drew their perception of these key documents after what the groups presented to auditory. After refinement process the participants create the final versions of these documents.

Strategic map

After the vision was clarified, the strategic goals for each of four perspectives were created to determine the way the organization intends to achieve these goals. The organization built a strategy map from the top to the down, starting from with strategic objective and charting the rout to it through all four perspectives.

Following Norton and Kaplan’s (2007) approach, business stages and financial themes of the company were determined as “sustain”, the business to maintain the existing market share and attract investments, but required it to earn excellent returns on capital.

The processes most critical for the organization strategy to succeed were identified. The business process management system was set as the main strategic goal. This should be achieved by improving company’s standards for all business processes according to best practice. The second strategic goal was an internal perspective of optimizing the ore flow creation process, which should lead to customer satisfaction in the final product. The last strategic goal for the internal business perspective is increasing labor productivity and, as a result reducing the number of employees and improving cost structure by decreasing expenses. Innovations were determined as drivers for proposed improvements.

A strategic map of the company created by senior and middle level management, comprised of all four perspectives with cause-and-effect relationships, is shown in Fig. 3.

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Project management as strategy implementation tool

While IC theory is useful for evaluating the role of intangible assets and critical resource distinction, and the BSC approach is a good tool to identify strategy formulation and cascading it to all levels of organization at this stage; the implementation of strategic initiatives and alignment with ongoing mining operational activities Project Management is a useful tool.

Projects are means of organizing activities that cannot be addressed within the organization’s normal operational limits, they are usually utilized as means of achieving an organization’s strategic plan and have been recognized as a primary strategy delivering instrument for over five decades (Kerzner 2013; Thompson et al. 2012; Unger et al. 2012).

However, during the first stage of the consultative sessions, the task of conducting cascading aims on structural departments of the company has not been established as well as the issue of implementing strategy through the set of initiatives. This issue requires future research.