Intangible Assets and Competitive Advantage in the Knowledge-based Economy

URN No: 98/1236

John Barber, IESE, DTI

The competitive advantage of firms lies in those business activities which the firm knows how to do well. Factories and equipment can always be bought, employees hired, and technology licensed in but unless the firm and its management know how to combine and exploit these resources effectively a viable and competitive business will not be created. The knowledge which the firm possesses, its "knowledge base", thus plays a key role in the survival, profitability and growth of the firm.

Firms possess a number of different types of knowledge including scientific and technological knowledge, knowledge of their markets and customer base, knowledge of sources of supply of materials and components, the knowledge and skills of its employees, etc. Firms need to know how to organise various activities such as procurement, production, marketing, after sales service, innovation etc. and how to combine these to secure the profitable delivery of competitive products to the market. The firm also needs to know how to recruit and develop skilled employees and managers, to motivate them to work effectively and to encourage them to co-operate in the best interests of the firm as a whole.

Some of this knowledge can be purchased in the market place or by investing in activities such as R&D. This knowledge is often codified, that is it can be written down and easily absorbed by someone with the necessary expertise. If not protected by some form of intellectual property rights or by secrecy it can be readily acquired by competitors. In contrast other types of knowledge are only acquired through experience of the business concerned, through 'learning by doing'. Such knowledge is often 'tacit', not easily written down or communicated except by direct human experience, and is not easily acquired by competitors who must create such knowledge for themselves. Much organisational knowledge is of this kind. Tacit knowledge is a major source of competitive advantage for firms.

It is easy to show the role which knowledge now plays in the competitiveness of firms. Many firms particularly in high technology and high value added sectors show a very large gap between the stock market value of the company and the book value of its tangible assets. This reflects the value of firms' intangible assets most of which consist of the stocks of knowledge which the firm has built up or acquired.

The importance of knowledge in firms' competitiveness and economic activity is not new. The craftsmen's guilds of medieval Europe placed great importance on the 'mysteries of their trade' which they were very concerned to protect. However those changes which are making up the transition to a 'knowledge based economy' are greatly increasing the importance of knowledge in economic activity and the competitiveness of firms. They are also changing the kinds of the knowledge which firms need to possess, the way that knowledge is acquired and managed, the way firms are organised and the kinds of knowledge and skills required of their employees.

The increasing importance of knowledge is shown by the fact that in many sectors investments in intangible assets are now much greater than those in fixed capital equipment. Thirty years ago advanced industrial economies were dominated by sectors such as steel, bulk chemicals and power generation which invested large amounts in plant and machinery. By contrast the rapidly growing sectors of the 1990s such as electronics, pharmaceuticals and telecommunications invest mainly in R&D, software and information technology, advertising and training. Some emerging sectors, such as those associated with the Internet, hardly invest in fixed assets at all. Many firms and organisations including the OECD are directing a lot of effort towards improving the measurement both of intangible assets and of the returns to investments in knowledge acquisition and creation such as R&D and training. Some firms are now appointing senior executives with responsibility for 'knowledge management'.

The number of technologies used in the production of a given product or service is increasing and firms need expertise in a greater range of technologies than before. This combined with the accelerating pace of scientific and technological change means that firms increasingly resort to R&D collaboration and out-sourcing to acquire the technologies they need. Development of leading edge science and technology is now undertaken in many more locations and, together with the increasing globalisation of markets, this means that firms must be prepared to seek technology relevant to their business from wherever in the world it is to be found. Developments in information and communication technologies, particularly the Internet, provide radical new ways of doing this.

The nature of technology used by firms is changing as well. Twenty years ago firms in sectors such as mechanical and electrical engineering mainly depended on the skills of their designers, draftsmen, production engineers and craftsmen for their technology. Now the technology of leading edge firms in this sector consists of computer aided design and manufacture (CADCAM) and knowledge of a range of advanced technologies including electronics, advanced materials and software. The various stages of the production process and the interface between the firm and its customers is now managed electronically rather than via engineering drawings. Traditional craft and production engineering skills have been replaced by computer design and the ability to integrate successfully the various elements of a computer controlled manufacturing system.

Such production systems need to be organised in a very different way from traditional mass production. Workers operate in small self organising teams carrying out a range of tasks and need to be multi-skilled. Together with the huge improvements in information processing brought about by developments in information technology this results in big reductions in the number of layers of management. The increasing complexity of technology has increased the extent to which key components are sourced outside the firm and the degree to which firms need to understand the technology of their customers. The firm must be able to use information gathered at all levels within its organisation and from its customers and suppliers and the outside world generally. There is much greater interdependence and communication among workers, firms, their customers and suppliers.

Managers and workers now need to be much better educated and much more highly trained. The increasing speed of technological and organisational change means that employees need to be much more flexible and require much more training and upgrading of their knowledge and skills during their lifetime. There will need to be mutual commitment between firms and their employees so that firms will have an incentive to invest in training while employees have an incentive to acquire knowledge and skills specific to the firm in which they work. At the same time the firm will need flexibility between what it produces itself and what it sources from outside and therefore in the numbers and types of workers which it employs. The management of these conflicting requirements is a challenge not just for firms but also for Society as a whole.

Studies carried out by the OECD show that the Industrialised World is coping with the transition of a knowledge-based economy in a variety of ways and that a solution to the challenges which this transition poses is not to be found in any one region of the OECD. North America, Europe and the Asia-Pacific Region all have something to learn from each other. Such exchanges of knowledge will be a key part of all our economic futures.

Contact Details: