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Kaplan, R. S. and D. P. Norton. 2004. Measuring the strategic readiness of intangible assets. Harvard Business Review (February): 52-63.

Summary by Adrienne Perez
Master of Accountancy Program
University of South Florida, Fall 2004

Balanced Scorecard Main Page | Performance Measurements Main Page

The purpose of this article is to propose a way to value intangible assets in a corporation. It involves an attempt by the authors to develop an adequate method of measuring the intangibles of a corporation such as company culture and the company’s workforce.

As Kaplan and Norton point out, there is a very important reason for measuring the value of such intangibles. Certain intangibles are hard for competitors to replicate. These types of intangible assets include employee skills, information technology systems, and the organization's culture. Because of this, the company that possesses the right set of intangible assets has a powerful competitive advantage. Such a competitive advantage should be valued so companies can benefit further from improvement. Being able to estimate the value and effectiveness of intangibles allows management to manage the company’s competitive position much more effectively.

For a better estimation, managers must realize that some intangible assets much be combined with other intangible assets. For example, an information system by itself does not have nearly as much value as an information system coupled with human resource training programs. Another key aspect of effectively estimating the value of the intangibles is that they must be aligned with the corporate strategy. Once they have been aligned, the corporation can realize their full potential. One important reason for the combination of intangible assets is that they never directly affect financial performance. They only affect financial performance through the complex cause and effect chains of the corporation.

To begin the process of measuring the corporation’s intangible assets, management must identify related problems. With this understanding, management should see that measurement of the value created is directly embedded in the corporation’s strategy. The company's strategy must be considered in the process because management can not value their intangible assets in a vacuum. Strategy adds value to the intangible assets so the relationship between intangible assets and strategy must be considered and understood. With this knowledge, it becomes clear that measuring intangible assets is actually “about estimating how closely aligned those assets are to the company’s strategy.” For alignment to work properly, the company must have a strong strategy.

Strategic Readiness

According to Kaplan and Norton, there are three categories of intangible assets that are essential for implementing any strategy identified in the Learning and Growth Perspective of the Balanced Scorecard: human capital, information capital, and organization capital. Human capital is defined as “the skills, talent, and knowledge that a company’s employees possess.” Information capital is the network, databases, information systems, and infrastructure of the organization. Organization capital deals with the culture of the corporation, leadership of the company, how aligned the employees are with the strategy of the organization, and the ability of the employees to share knowledge. A strategy map is a useful tool for linking strategy with the company's intangible assets. The strategy map shows that intangible assets influence the performance of a company through enhancing internal processes. The processes that should be targeted are those that are most critical to creating the value for the customer and shareholders of the organization. To build their strategy maps, companies should work top down. To begin the measurement process, companies must focus on the bottom of the strategy map because that is where it can be seen that intangible assets determine the performance of the internal processes. The assets can then be aligned with the strategy and performance of the company by tracing back through the steps. The extent to which the intangible assets “contribute to the performance of the internal processes determines the strategic readiness of those assets and thus their value to the organization.”

Strategic readiness is defined as:

Human Capital - Is measured by whether the employees have the right kind of skills and correct level of skills to perform the internal processes on the strategic map.

Information Capital - Is a measure of how well the company’s strategic IT portfolio of infrastructure and applications support the internal processes.

Organizational Capital - Is measured through the alignment between the organization’s strategic objectives and the performance results of the internal processes.

Human Capital Readiness

The key to human capital readiness is to identify the important jobs that have the greatest impact on a successful strategy implementation. Once identification has occurred, management must perform a considerable amount of job profiling to thoroughly understand the knowledge and skills needed to perform those jobs. By identifying and understanding the important jobs, the organization can learn the state of their human capital and then determine whether the strategy could be further implemented.

Information Capital Readiness

It is important for management of an organization to understand how to plan their information capital as well as set certain priorities. They must also know how to manage the information. The strategy map should be used to aid in the evaluation of whether the company’s information capital achieved the information capital objectives. Management may need to implement new applications to achieve those goals or enhance the applications that are currently in the information system.

Organization Capital Readiness

For the performance of internal processes identified in the strategy map to be successful, the organization must change in fundamental ways. The essence of assessing organization capital readiness is basically assessing how well the company can move and maintain the change agenda for the new strategy. There are four dimensions related to organization capital: culture, leadership, alignment, and teamwork and knowledge sharing.

Culture is the most important dimension because it contains a broader range of behavioral territory. This complexity causes culture to be harder to understand. A way to assess the organization’s culture is to administer employee surveys. Managers must also understand that a variation from the desired organizational culture is not bad. It might be a necessary variation depending on the function department.

Leadership is the key for the effective implementation of the strategy. The “tone at the top” strictly lies in the hands of the executives and management. This message must be clear to help the employees understand what changes will be needed. Motivation for the change is also important for the leaders of the organization to portray to employees. To help top management see the leadership that will be needed, the organization should create a leadership competency model for each of the leadership positions.

Alignment deals with having the entire organization share a common purpose and vision. Employees must understand their personal roles in achieving of the overall strategy. When an organization is aligned, certain things are encouraged like innovation and empowerment. To achieve alignment, there is a two step process to follow as follows.

Step 1: Management must communicate the high-level strategy objective in a way that all employees will understand.

Step 2: Employees must set explicit personal and team objectives aligned to the strategy. The organization establishes incentives that reward employees that meet the objectives set forth.

Teamwork and knowledge sharing is important because great ideas should not be used only once. Kaplan and Norton believe that an organization can possess no greater asset than the collective knowledge possessed by employees. An important aspect of knowledge sharing is that it must be aligned with the priorities of the strategy map. When both teamwork and knowledge sharing are aligned properly, organizations can improve their performance.

Conclusion

The intangible assets identified in the balance scorecard’s learning and growth perspective are clearly the foundation of an organization’s strategy map, and are directly related to the organization’s strategy. The most valuable intangible category is human capital because of its emphasis on the most important jobs. A few key performers actually implement the strategy of the organization. With the rise in the popularity of the Balance Scorecard, more and more organizations have moved towards measuring their intangible assets. These measurements play an important role in the achievement of the organization's strategy and according to Kaplan and Norton are "the ultimate lead indicators" (p. 63).

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