The 2nd wave of knowledge management: The management control of knowledge resources through intellectual capital information

Management Accounting Research 16 (2005) 371–394

The 2nd wave of knowledge management: The management control of knowledge resources through intellectual capital information Jan Mouritsen ∗ , Heine Thorsgaard Larsen Copenhagen Business School, Department of Operations Management, Solbjerg Plads 3, DK 2000 Frederiksberg, Denmark Received 14 May 2004; accepted 23 June 2005

Abstract Through the 1990s, knowledge has become a phenomenon to be managed and intellectual capital information has been suggested to be medium for this ambition. In this paper, we propose a method to analyse (and design) intellectual capital information so that it can be an input to the management of knowledge resources. We use a distinction between 1st and 2nd wave knowledge management to illustrate two possible objects of knowledge management: the creative individual and the network of knowledge resources. We suggest that intellectual capital information is related to the management control of knowledge resources where knowledge resources are related to questions about economising, organising and modularising them. In effect, intellectual capital information sees knowledge resources from a management control perspective. We illustrate this with an analysis of the firm Coloplast’s intellectual capital statement. © 2005 Elsevier Ltd. All rights reserved. Keywords: 2nd wave of knowledge; Capital; Management control

1. Knowledge society and intellectual capital information The purpose of this paper is to analyse the difficult, new, complex, ‘people-centred’, ‘fuzzy’ and intangible resource ‘knowledge’ in a management control perspective and discuss how it is made ∗

Corresponding author. E-mail address: [email protected] (J. Mouritsen).

1044-5005/$ – see front matter © 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.mar.2005.06.006

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manageable – how is it a resource that managers develop, influence and orient towards corporate purposes? As Otley (1999) points out, the new challenge in management control is the transition from measurement to management, and a wholly parallel concern can be raised in relation to the measurements of knowledge found in intellectual capital statements. How are they part of management control processes? In knowledge society, intellectual capital is accorded a significant role in the development of intangibles and knowledge towards value creation (Choo and Bontis, 2002; Lev, 2001; Marr, 2005; Marr et al., 2004; Roos and Roos, 1997) through management attention to what has been termed human, organisational and customer capital (e.g. Roos et al., 1997; Edvinsson and Malone, 1997; Meer-Kooistra and Zijlstra, 2001; Sveiby, 1997). Typically, the literature defines human, organisational and customer capital as separate entities and then proposes that they are related causally so that human capital creates knowledge which then can be stabilised in organisational capital to develop customer relations (Fernstr¨om et al., 2004; Johanson et al., 2001a, 2001b; Marr et al., 2004; Roberts, 2003). Much intellectual capital literature is concerned to uncover the true, hidden value in intangible resources via direct measurement of its elements and via claims about their leading role to lagging financial value (Choo and Bontis, 2002; Petty and Guthrie, 2000). This ambition to develop leading-lagging relations in intellectual capital is understandable but it is a problem that the measurement of its entities and their interrelationships is presented as the solution to its value creation potential. The concern for intellectual capital stops at its measurement and then it is expected to function smoothly and automatically towards value creation. This is probably very optimistic because it does not explain how information about intellectual capital works. There is an additional management control agenda where information about intellectual capital is an input to management activities. This agenda parallels Otley’s (1994, 1999, p. 364) suggestion that management control researchers should start ‘looking beyond the measurement of performance to the management of performance’. The purpose of this paper is to analyse the transition from measurement to management in relation to intellectual capital, and as suggested by Otley (ibid., p. 381) this means to be able to understand the relationships between measurement on the one side and operational activities, strategies and context on the other. While he proposes to study the relations through systems theory, we are more concerned with situated relationships between information and intervention (Ahrens and Chapman, 2004). The paper therefore studies how information contained in an intellectual capital statement may be transformed into management activities. The question is how information about intellectual capital will help managers (and other readers of intellectual capital statements) to intervene into processes of organisational knowledge development, sharing and application. This is different from the typical literature on intellectual capital which is concerned with describing the ‘size’ of the three elements human, organisational and customer capital or the stable, causal relations between them (see Petty and Guthrie, 2000). Information about intellectual capital is related to the development, sharing and application of organisational knowledge; it is concerned with the production function of knowledge (Drucker, 1993, p. 7). However, there may be different ways in which intellectual capital information is input to organisational knowledge development, which is why we make a distinction between a 1st and a 2nd wave of knowledge management. The 1st wave centres the person as the source of all knowledge and the knowledge management problem is to spread individual persons’ tacit knowledge to others. The 2nd wave, in contrast, decentres the individual and makes him or her one among several networked knowledge resources. This

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is the management control problem concerning the design of a network of knowledge resources relevant for corporate purposes. Intellectual capital information is particularly relevant in relation to the 2nd wave of knowledge management because this is where managers intervene to design the constellation of knowledge resources and this includes attention to possible ways in which different knowledge resources can substitute each other. The 2nd wave is not primarily concerned with ‘insight’ into something, but more with the ability to ‘do something’. Knowledge – facts, theory, machines – is, as Latour (1987, p. 248) proposes, not a separate thing but an element completely entangled in networks: No one has ever observed a fact, theory or machine that could survive outside the networks that gave birth to them. Still more fragile than termites, facts and machines can travel along extended galleries, but they cannot survive one minute in this famous and mythical ‘out-thereness’ so vaunted by philosophers of science. The 2nd wave of knowledge management draws on intellectual capital information to develop knowledge resources in an organisational context (see also Andon et al., 2003; Austin and Larkey, 2002; Hartmann and Vaassen, 2003; Mouritsen et al., 2001a,b). It addresses how the management control of knowledge resources allows concerns about economising (how much to invest in knowledge resources), organising (where to locate knowledge resources) and modularising (how to standardise knowledge resources) to appear. This point adds to the literature on intellectual capital because it shows how intellectual capital information can be an input to – a beginning of – a management control process where managers have to make informed judgments about the relationships between measurement and management. It is a management control problem where measurements in intellectual capital statements enable managerial intervention: management here means ability to intervene and the specific objects of a management control system identified by Otley (strategy, targets, rewards, information) are part of this and in our discussion the focus is on the interventions made by managers to couple information with strategies and operations. The paper is structured as follows. First, the paper characterises the 1st wave of knowledge management through an analysis of Nonaka’s version of knowledge management (which is one reading of intellectual capital). The point is here to show how knowledge and intellectual capital are seen as one item emanating from the heads of people. It is easy to understand that this is not a nice prospect for managers, because if knowledge is tacit and in the heads of people, how could a manager intervene? This section is followed by an account of how knowledge can be managed as a network of knowledge resources (which is another reading of intellectual capital) where knowledge is interesting only in its capacity to help company objectives to develop. The two objects of knowledge management are compared, and it is concluded that the two waves of knowledge management differ considerably. To illustrate how the 2nd wave of knowledge management is a management control process, the firm Coloplast’s intellectual capital statement is analysed. We substitute the conventional idea that intellectual capital information is leading indicator to lagging financial results with the proposition that the dual task of reading the intellectual capital statement from its numbers and its text can be done analytically and intelligently without suspending managers’ task to manage the firm. Intellectual capital information, we suggest, is part of a management control system rather than a predictive function. The intellectual capital statement helps to make the management of knowledge a durable activity. Our concern of this paper is to show how this works and to suggest analytically how the management control of knowledge resources is possible.

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2. 1st and 2nd wave of knowledge management 2.1. 1st wave: knowledge embedded in individuals The 1st wave can be traced to Maslow and Herzberg’s management theories from the 1950s where they argue that the single individual’s personal motivation plays a crucial role in realising their creativity.1 In the 1980s, Peters and Waterman (1992) repeated Maslow and Herzberg’s point that the single individual’s involvement is an important driver of corporate success, because excellence was assumed (even then) to be a product of flat organisations. Opportunities for individuals to use their skills were not valued for altruistic reasons, but because such conditions tended to produce creative companies. Later, Sveiby (1987, 1997) continued this line of research focusing on the importance of the creative individual to knowledge organisations, just as Bartlett and Ghoshal (1997) talked about the individualised company developing Nonaka and Takeuchi’s (1991, 1995) focus on the individual as the place where value is created through his/her knowledge. Knowledge is in individuals and it is the organisation’s task to control the individually based knowledge. Nonaka (1994, p. 17) explains this very precisely: “At a fundamental level, knowledge is created by individuals. An organisation cannot create knowledge without individuals. The organization supports creative individuals to create knowledge. Organizational knowledge creation, therefore, should be understood in terms of a process that ‘organizationally’ amplifies the knowledge created by individuals, and crystallizes it as a part of the knowledge network of organization . . .. The prime movers in the process of organizational knowledge creation are the individual members of an organization.” Nonaka discusses a particular type of individual, namely ‘the performing individual’ or ‘the creative individual’ who is the ‘core of production’ and the central object in the management of knowledge. In the 1st wave, all knowledge – and thus the very core in the organisation’s capability to act – is assumed to come from and originate in individuals. To improve the organisation’s capability to act, individuals must create a large quantity of personal knowledge and share it with other individuals in the organisation. On this basis and with the fundamental precondition that (new) knowledge is created through converting tacit knowledge into explicit knowledge and vice versa Nonaka – and the 1st wave in the knowledge management literature – operates with four different forms of processes through which knowledge is distributed (see Fig. 1). The matrix shows the four possible types of relations between tacit and explicit knowledge. These patterns “represent ways in which existing knowledge can be ‘converted’ into new knowledge. Social interaction between individuals then provides an ontological dimension to the expansion of knowledge” (Nonaka, 1994, p. 18). The special techniques for supporting knowledge management, which appeared in the 1990s, can be categorised (slightly caricatured) in Fig. 2. One category of knowledge management activities is oriented towards knowledge processes where explicit knowledge is shared and/or converted into new explicit knowledge. Often, the idea is that the techniques should involve intranet and other technological tools 1

Also in the 1950s, Polanyi (1958) wrote about the personal and tacit dimension of knowledge. However, Polyani did not deal with knowledge as a management object and his theories had no great impact on management discussions for two decades. But at the end of the 1980s and beginning of the 1990s things changed, and Polyani’s theorising of knowledge became a central source of inspiration for Nonaka’s theory of knowledge distribution as the primary issue in knowledge management.

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Fig. 1. Knowledge processes.

(Davenport and Prusak, 1997). Another category focuses more on transforming tacit knowledge in one individual to tacit knowledge in another individual. In this case, efforts to activate knowledge distribution include an easy-going environment, open-plan offices, coffee breaks, water fountains, etc. The two last categories represent possible combinations. Although it is possible to present knowledge in an explicit form, in the 1st wave this is not the most important form of knowledge or the most important object for knowledge management. Knowledge is a “dynamic human process of justifying personal beliefs as a part of an aspiration for the ‘truth’.” (Nonaka, 1994, p. 15). Therefore, real knowledge is always found with the employee or employees directly involved in the company’s environment. It is placed in individuals and knowledge management is more or less synonymous with knowledge distribution, where knowledge is transferred from one individual in the organisation to other individuals. This concern with the individual is clearly also manifest in some definitions of intellectual capital where control is seen as problematical and issues of freedom, creativity and knowledge sharing are central (Chang and Birkett, 2004; Roberts, 2003). Intellectual capital debates have been concerned with how tacit, individual knowledge is the foundation of all knowledge. For example, to Stewart (1997) ‘[m]oney talks, but it does not think; machines perform, often better than any human being can, but do not invent . . .. [The] primary purpose of human capital is innovation – whether of new products and services, or of

Fig. 2. Knowledge management techniques.

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improving in business processes’. Sveiby (1997, pp. 10–11) says that ‘employee competence involves capacity to act in a wide variety of situations to create both tangible and intangible assets’; and Edvinsson and Malone (1997, p. 11) sees human capital as the ‘combined knowledge, skill, innovativeness and ability of the company’s individual employees’. Humans are active and creative while organisational and customer capitals are passive waiting to be used – it is ‘everything left at the office when the employees go home’ (ibid). 2.2. 2nd wave: intellectual capital The 1st wave plays an important role in large parts of the intellectual capital debate, but some literature is developing an alternative that we call the 2nd wave of knowledge management. Decentring the role of human capital and suggesting that organisational and customer capital are just as central, ‘mere’ knowledge development and distribution can be rendered secondary to the concern for the networked and collective effects of all three forms of capital (Lev and Radhakrishnan, 2003; Mouritsen and Koleva, 2004). Here, the object of management is not primarily knowledge embedded in individuals, but rather bundled knowledge resources involved in producing and creating value (Prahalad and Hamel, 1990). Individual items of knowledge are always oriented towards something outside the person – e.g. a technological issue, relevant services or effective processes – and therefore, knowledge is not a lump of individualised information but a practice. 2.2.1. Intellectual capital information: inscriptions of networked knowledge resources Even if the employee is a person, characterising him or her purely as an individual is insufficient, since s/he is not separated from organisational action and pressures. In the 2nd wave of knowledge management, there is a shift from the level of the individual to the level of knowledge resources, and there is an ambition to find ways to make the management of knowledge possible via intellectual capital information. This requires a translation of ‘three-dimensional’ objects into ‘two-dimensional’ inscriptions in intellectual capital information (Cooper, 1992; Latour, 1999, chap. 2) to make it possible to survey the composition, the development and the effects of knowledge resources. The translation into numbers is not only a representation of knowledge resources; it is more a translation that allows somebody to intervene and change the way knowledge works. Such a translation accumulates inscriptions (numbers), adds them together, and finds new version(s) of the knowledge production function that allows knowledge to be acted on at a distance (Latour, 1993): All these inscriptions can be superimposed, reshuffled, recombined, and summarized, and totally new phenomena emerge, hidden from the other people from whom these inscriptions have been extracted Here, Latour says that paperwork (inscriptions) is highly flexible. It is possible to add, subtract, multiply or divide numbers and new phenomena will emerge. It is possible to integrate indicators about effects, efforts and resource constellations in new ways and suddenly get new versions of what intellectual capital is and is doing in the firm. When firms embark on developing intellectual capital information they are interested in making knowledge manageable and this typically involves an interest in developing reports about knowledge (see also Huges et al., 2002). In the process of developing and using such intellectual capital statements, firms inscribe a series of heterogonous knowledge resources such as employees, processes, customers and technologies, each of

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which is a possible object for decision-making. The person is bound up in relations to technologies and procedures of the firm, and he or she is dependent on the clientele of the firm. The person is always entangled and bound up in relations, and therefore it is not possible for the firms to separate between the functions of human, organisational and customer capital. One example is that the transaction ‘training expenses’ may very well be a statement about human capital, but if we add that this training is about IT literacy one wonders if this transaction is not ‘really’ about organisational capital, and if in addition we know that the IT literacy in question is to use the firm’s Customer Relationships Management system, the transaction could also be considered customer capital. The boundaries lie between human, organisational and customer capital blur and it is difficult to uphold them as more than metaphors. In the 2nd wave, the object is not primarily knowledge in Nonaka’s sense, i.e. knowledge as individual possession. In the 2nd wave, knowledge management concerns the composition, application and development of the company’s knowledge resources at large, and therefore knowledge resources are interesting if they allow the firm to be able to do something and to create value. This is probably no surprise. However, it is surprising how value is considered in the 2nd wave because it is used not so much to identify the objective of corporate activities as to allow a reasoned approach to develop the constellation of knowledge resources. The 1st wave assumes that people will to try to know what is appropriate to know; the 2nd wave suggests that it is a corporate concern to identify what has to be known. 2.2.2. The purpose of knowledge There is a problem of how to know what is appropriate to know. To make this inference possible, firms often relate their knowledge to the effects it may have on a user. This is an abstract user – an idealised Weberian type – who may not exist in any particular concrete situation but who allows the firm a reasoned approach to the construction of the constellation (network) of knowledge resources. The relationships between the idealised user and the firm’s knowledge resources are potentially counterfactual: if certain effects have to be in place, the firm has to be able to master certain activities. This translation between ability to make a difference and the constellations of knowledge resources makes the user interesting and suddenly the user is not external to knowledge resources. The user is an analytical proposition that is part of the whole constellation or network of knowledge resources. This is not a ‘whole user’ because when constructed by firms, the user is an invention built around the capabilities of the firm. The user is a node in a network of activities that is defined from the perspective of the firm. This is the consequence of seeing knowledge as a resource built and developed over time. Compare Grant’s (1988) view of resource based strategy theory: The starting point for the formulation of strategy must be some statement of the firm’s identity and purpose – conventionally this takes the form of a mission statement which answers the question: ‘What is our business?’ But in a world where customer preferences are volatile, the identity of customers is changing, and the technologies for serving customer requirements are continually evolving, an externally focused orientation does not provide a secure foundation for formulating long-term strategy. When the external is in a state of flux, the firm’s own resources and capabilities may be a much more stable basis on which to define its identity. Hence, a definition of a business in terms of what it is capable of doing may offer a more durable basis for strategy than a definition based upon the needs, which the business seeks to satisfy. Grant says that the market (where financial valuation takes place) may not be a strong asset because it is fragile. It is more appropriate, Grant says, to concentrate on the firm’s own resources and competencies

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for strategic purposes when the external world is in a state of flux. The ability to do something is more durable than fleeting markets. This is why, even if the user is part of the storyline of the achievements of the firm, its capabilities help identify – or construct – what the user may be and what the user may require.2 In a knowledge management context, resources – e.g. employees – are interesting precisely as knowledge resources that are related to various forms of information, intelligence, know-how and reflexivity. Therefore, only skills and competencies that are central in producing something valuable for an (idealised) user matter from an intellectual capital perspective. In such an approach, employees (and other knowledge resources such as customers, processes and technologies) are assessed according to the role they play in creating this value. They act as knowledge resources in a specific context and company. This is also why knowledge resources constitute a production function that focuses on the production of value (however defined) and are part of a business model about how certain resources are mobilised (Bukh, 2003). It is not really a stakeholder-relation in the sense, at least, that is concerned with the distribution of value. Stakeholder theory is concerned to create an inducement/contribution ratio for each stakeholder and is thus in principle a conflict theory about the distribution of value. Intellectual capital and the 2nd wave of knowledge management are focused on the production of value and disregard the distributive effects of decisions about knowledge (see also Fincham and Roslender, 2003). 2.2.3. The constellation of knowledge resources Intellectual capital statements produce, collect and compare numbers representing the composition, development and effects of an organisation’s knowledge resources with a view to showing how intellectual capital functions “more as a tune, a continued flow of tones. To comprehend and experience the tune, we must think both ahead and back; weave the present together with the past and the future and with external and internal relations.” (Grafstr¨om and Edvinsson, 1999, p. 32). This metaphor suggests that the music is greater than the individual, creative musician. The music reflects all the relations between the musicians, the tune, the composer, the conductor and perhaps even the audience, who by their presence may encourage the musicians to intensify their efforts. Attention is focused on relations; on the complementarity between resources; on bundles of resources. In the 2nd wave, knowledge management concerns the organisation’s competencies. Attention is not focused on one crucial factor, a single individual’s creativity and skills. Knowledge is organisation wide and concerns processes of internal knowledge creation, of external knowledge acquisition and network activities more broadly. In other words, in the 2nd wave, knowledge management concerns developing, distributing and securing the organisation’s knowledge resources. The idea is to make employees’ skills and knowledge interact with other employees’ skills and knowledge and with the company’s technologies and processes as well as in relation to customers/users. Knowledge is no island. Rather than focusing on Nonaka’s individual person, 2nd wave knowledge management focuses on Hamel and Pralahad’s corporate competencies: “A competence is a bundle of skills and technologies rather than a single discrete skill or technology . . .. A core competence represents the sum of learning across individual skill sets and individual organisational units. Thus, 2

Why centre the user and not the owners? Focusing on the value to a user allows the firm to reason and argue about the composition and development of knowledge resources, which responds to the question whether the firm can produce things needed by someone. Whether the capabilities to do certain things have interesting financial consequences depends on so many other things than capabilities per se including the competitive situation and the customers’ ability to pay. Obviously, firms are interested in the financial consequences of investments in knowledge, but the translation between a knowledge based firm and its financial consequences are related not only to the quality of its knowledge; but also to the ability to generate funds. These may be related – firms hope – but they are not always.

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a core competence is very unlikely to reside in its entirety in a single individual or small team” (Hamel and Prahalad, 1994, p. 223). The 2nd wave is based on the assumption that this is important because: “in the long run, competitiveness derives from an ability to build, at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products. The real sources of advantage are to be found in management’s ability to consolidate corporatewide technologies and skills into competencies that empower individual businesses to adapt quickly to changing opportunities.” (Prahalad and Hamel, 1990, p. 81) It is suggested that the company’s knowledge resources are bundles of technologies and skills and they make up corporate and organisational competencies. In the 2nd wave, the organisation’s ability to act is conceptualised as a flow of organisational practice built on a reservoir of different knowledge resources rather than on pools of insight as in the 1st wave’s distributed knowledge. In the 2nd wave, knowledge management focuses strongly on corporate processes and procedures (Prahalad and Hamel, 1990, p. 86) concerned with integration of technologies, skills, processes, and relations. 2.2.4. Knowledge, intellectual capital and (un)certainty The non-intuitive conclusion is that intellectual capital is not really interesting primarily because some fundamental rules of management have changed so that the creative potential of knowledge to disrupt and transform organisational practices is in place (Webber, 1999). Intellectual capital is concerned to discipline the creative potential of knowledge intensive firms; it addresses the control problem that knowledge brings about. Knowledge is used to problematise the affairs of the firm, which means that more knowledge creates more problematisation. In turn, more problematisation develops more uncertainty, and more uncertainty then creates more fragile organisational systems (Giddens, 1990). When knowledge produces uncertainty and frailty, the control problem is concerned to establish a new form of certainty (through knowledge about knowledge) where intellectual capital information cautions managers to survey the properties of, the development of, and the effects of the firm’s knowledge resources. Knowledge management in the 1st wave creates uncertainty, while knowledge management in the 2nd wave creates new forms of certainty (Fincham and Roslender, 2003; Lukka and Granlund, 2003; Mouritsen and Kreiner, 2003).

3. From 1st to 2nd wave of knowledge management We can point to three central shifts between the 1st and the 2nd wave. First, there is a shift from knowledge management’s narrow focus on knowledge distribution to a broader view of all knowledge resources. Second, the idea of knowledge has shifted from ‘true knowledge’ to ability to make a difference to users of the company’s products or services.3 Third, we can also detect a shift from ‘intranet and openplan offices’ to knowledge management, centred on translating the organisation’s knowledge resources and knowledge management activities into numbers and vice versa to make knowledge manageable. Together, the three shifts have moved knowledge management from personnel management to a concern with various kinds of resources that build on or store knowledge and information. The focus is on different knowledge resources found in employees, technologies, processes and customers. To suggest how they are 3 This shift can be viewed – slightly reformulated by Austin (1976) – as a shift in focus from constantive to performative knowledge.

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Table 1 Elements of an intellectual capital statement 1. Knowledge narrative: A narrative about the firm’s ambition to create (use) value for its users and the required types of knowledge resources to accomplish this: • What product or service does the company provide? • How does it make a difference for the user? • What knowledge resources are necessary to be able to supply the product or service? • How does the constellation of knowledge resources produce the service/product? 2. Management challenges: The durable challenges posed by the role of knowledge resources in the firm’s business model: • How are the knowledge resources related? • Which existing knowledge resources should be strengthened? • What new knowledge resources are needed? 3. Efforts: The initiatives to compose, develop and procure knowledge resources • What initiatives, actual and potential, can be identified? • What initiatives should be given priority? 4. Indicators: The mechanisms of monitoring the portfolio, development and effects of knowledge resources: • Effects – how do activities work? • Activities – what does the firm do to upgrade knowledge resources? • Resource mix – what is the composition of knowledge resources?

relevant to the firm, the intellectual capital statement can be organised around four dimensions, namely: knowledge narrative, some management challenges, some initiatives and some indicators, see Table 1 (Mouritsen et al., 2003a). The four elements of Table 1 are related, but they are not a linear translation from strategy to evaluation. Every time a translation has taken place between these four elements, it not only develops the translated element but also the translating element. So, when management challenges are defined, we know more about the knowledge narrative, and when indicators have been developed we know more about the initiatives. This is the case even to the point where indicators can tell us more about what we mean by “strategy”. This point is to a certain degree a challenge to other conceptualisations of how strategy translates into indicators which then drive strategy (e.g. Kaplan and Norton, 2001) where certain leading indicators will cause lagging indicators (see also Marr et al., 2003). The story of leading and lagging indicators is intuitive but in intellectual capital it is ambiguous. Leading-lagging relations constitute a prediction that is upheld if the indicators involved correlate. This means that the numbers are seen as strong representations of an underlying reality. But is this the case?4 Commenting on indicators in intellectual capital statements, Edvinsson and Malone (1997, p. 185) say: ‘Is this a definitive list? Hardly’, and Sveiby (1997, p. 150) says that ‘[t]he measurement system that I propose does not present a full and comprehensive picture of a company’s intangible assets; such a system is not possible’. If it is not possible to find a system of indicators that strongly represent an underlying reality of intellectual capital, correlations between leading and lagging entities do not show a lot.

4 Comparisons between balanced scorecard and intellectual capital definitions can be found in Marr and Adams (2004) and Mouritsen et al. (2005)

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Listening to Grant’s (1988) point that the ‘firm’s own resources and capabilities may be a much more stable basis on which to define its identity’ which is built over years and decades it is not clear that strategy will be a causal mechanism between indicators that are located narrowly in time. This is why the intellectual capital statement is not only concerned with indicators but also with efforts, with a business model of knowledge and with a narrative of how to achieve things. The important relations are not (potential) correlations between indicators, but how indicators help the firm to understand efforts, business models and narratives. Each element is part of a heterogeneous network of elements rather than of a causal model of indicators. The intellectual capital statement provides information about linkages between the firm’s capabilities; it helps express what they are and how they can be managed; and it helps to monitor whether knowledge resources are developed and applied. This makes management control a particular thing in relation to intellectual capital information. It is strategic, but it does not translate from something ‘up there’ to something ‘down there’; rather it integrates ‘up there’ with ‘down there’ and makes management control a question of simultaneous development of the efforts to make knowledge stronger, and an effort to make the strategy understandable because any strategy expression is attached to many (types of) efforts over time. So, rather than assuming that strategy is understood and just has to be driven down into the organisation, strategy may be a fragile proposition that gradually gets more and more power by being illustrated through the efforts and the monitoring that is presented in the intellectual capital information. The elements are therefore interactive and together they tell us about the firm’s knowledge resources.5 What is the evidence? Perhaps it will be useful to produce an example – the case of Coloplast.

4. Representing knowledge resources in intellectual capital information: Coloplast as example We know about Coloplast through a multiyear engagement with it when we followed its attempts to develop and justify their work with intellectual capital statements. Like Bruno Latour followed the designers of an electrical vehicle (Latour, 1996), or the development of means to combat animal deceases (Latour, 1988), we followed the design of an intellectual capital statement and sought to learn about the issues and concerns that motivated its intellectual capital statement to be of a particular kind and their work with it to be a particular process. We followed the development and use of the intellectual capital statement as a process of development and therefore we also came to understand that it was a means to and end, namely to influence behaviour internally and externally to the firm (Mouritsen and Flagstad, 2005). While in the beginning of the process, Coloplast’s ambition with the intellectual capital statement was to describe the firm’s knowledge resources and make them visible, towards the end of our engagement with the company, the interest was clearly related to the differences it would make to managers and other readers. The ambition to describe was turned into the ambition of intervention – that someone could influence the course of affairs in and around the firm – from measurement to management to paraphrase Otley (1999). The intellectual capital statement has different forms in the firm and it is not really one coherent report. Intellectual capital information is scattered in various types of information systems and reports and dispersed according to the different tasks that division of labour make visible. Externally, however, 5

They are interactive in a different sense than Simon’s (1995) interactive system which is a relation between a set of users and a particular mobilisation of an information system. If a comparison were to be made with Simon’s framework, the intellectual capital statement combines belief-systems interactive and diagnostic systems.

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the intellectual capital statement is a coherent piece of communication and we use this statement in the following discussion to suggest how it is possible to make knowledge manageable. There are differences between internal and external communication, but these differences do not negate the point that intellectual capital statements can be read analytically in relation to the management control of knowledge resources. Parts of Coloplast’s intellectual capital statement are included in its annual report (www.coloplast.com) and comprises up to 20 pages of text, images and numbers.6 Coloplast is a worldwide provider of healthcare products and services within ostomy, continence, wound, breast and skin care. The patient will typically not recover from his or her disease and therefore, Coloplast’s products relieve the patient. This is important to Coloplast, and the text of the intellectual capital explains the firm’s knowledge strategy and starts by stating the aim: ‘Throughout the world we wish, within our selected business areas, to be a preferred source of medical devices and associated services, contributing to a better quality of life.’ The proposed aim of knowledge is to create a better quality of life. The aim is not financial returns per se (which are clearly also expected) but quality of life. The text is a defence for this ambition, and the indicators are mobilised to support the text, just as the images are selected to produce a vision of a gentle firm. Readers may question whether Coloplast actually attempts to or does create quality of life, so what does the firm do to try to convince a sceptical readership about this? A readership can remain sceptical even if an external auditor verifies the intellectual capital statement, which an auditor has done in Coloplast’s case. The readership also wants to be able to understand the intellectual capital statement through analytical lenses. The problems of reading intellectual capital statements are quite understandable, because they are rarely in similar formats since there is no generally accepted format for the presentation of intellectual capital information, which makes the reading of the text, the numbers and the images a difficult activity. Somehow, readers want to step back and read it from a distanced position. Therefore, two interrelated questions puzzle readers of intellectual capital statements: How may an intellectual capital statement’s numbers be (constructed and) read analytically (Mouritsen et al., 2001c, 2003b)? And how may its text be (constructed and) read analytically (Mouritsen et al., 2002, 2003a)? Let us take these two readings in turn – first the numbers and then the text. 4.1. Reading intellectual capital statements’ indicators The reader of an intellectual capital statement faces similar problems to the reader of a financial statement (Mouritsen et al., 2003b). What is the main point or the coherent story? Can it be told in a language that does not require the reader to be familiar with all aspects of the firm’s business? As Table 2 shows, parallel questions can be asked in relation to the two types of statements and of the indicators provided in them. The first set of questions relates to the firm’s portfolio of resources, the second to its improvement activities and the third concerns the effects of the resources. Each of these questions can be asked about any of the firm’s resources, intellectual as well as financial. Indicators in actual intellectual capital statements typically inscribe employees, customers, processes or technology. Readers want to be able to understand 6 This is a piece of external reporting, and we use this as illustration of the issues related to writing and reading intellectual capital information. Internally, the Coloplast makes it knowledge resources visible in a number of ways around a set of information and reporting systems, but here it suffices to use the external intellectual capital statement as an illustration of the principles of accounting for knowledge resources. The framework proposed here also shows how ‘new and broader’ business models oriented types of reporting need not be undisciplined (as e.g. ICAEW, 2003, says).

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Table 2 Key questions to corporate reports Financial statement

Intellectual capital statement

What are the company’s assets and liabilities? What are the company’s investments?

Resources: How are the company’s knowledge resources comprised? Activities: What does the company do to develop and strengthen its knowledge resources? Effects: What are the effects of the company’s knowledge resources?

What is the company’s profitability?

the firm via a reporting system that summarises and presents them as a version of the firm’s situation and they ask how indicators about employees, customers, processes and technologies can be interpreted systematically? This is where the questions raised in Table 2 can help organise and report the indicators actually found in the intellectual capital statement. In Table 3, the indicators of Coloplasts’s intellectual capital statement are reported via the distinctions presented in Table 2. It is organised by type of knowledge resource (employees, customers, processes and technologies)7 on the vertical dimension and the three questions set out in Table 2 along the horizontal dimension. This analytical grid organises the indicators according to the three general questions. The purpose of introducing this grid is to reduce the complexity of 20 pages of text, numbers and illustrations into a format that allows these general questions to be asked and answered. It condenses the presentation of indicators that are spread across the text and in this way it draws up the development of the firm’s knowledge resources over time. It does not summarise this development in precisely the same way as a financial statement summarises the financial transactions through double entry bookkeeping to build a composite measure of profitability.8 Instead it develops a survey of the development of certain indicators organised in categories that can be explained generally in relation to general concerns facing ‘all firms’. Table 3 is a huge summary of 20 pages of text, images and indicators. The indicators are presented separately in order to allow one distanced reading to take place.9 Some of Coloplast’s indicators concern 7 These are the empirical types of indicators found in our research. There may be other types, but this requires research to identify them. This classification is created primarily from a concern for auditability, and in principle, all these indicators classify themselves in this accounting systems. E.g. statements about employees concern employees! Statements about customers concern customers etc.! Is this not obvious? No, not really. From other classification systems, other readings are possible. For example, in the balanced scorecard, market share can be a customer indicator or a financial indicator. Investments in technology can be an operations indicator and a learning and growth indicator. In addition, sometimes entities can be found in classifications systems that have no obvious referent. For example management quality, innovation, flexibility and customer orientation which are meaningless as indicators. In some firms innovation concerns number of new products, in others number of employed PhDs. In yet other organisations innovation is represented by number of patents. Therefore, the indicators are loosely coupled to the concept which is meaningful primarily as part of a narrative rather than as a transaction. 8 It is a question whether readers of financial statements are really only interested in profitability or whether they are more interested in learning about a series of indicators and ratios in the financial statement. The more pieces of information they are interested in, the more the reading of the financial statement resembles the reading of the intellectual capital statement. 9 Each indicator is obviously problematical from readers accustomed to financial statements, because no generally accepted rules have been established for the definitions and content of most of the reported indicators. This is recognised by Coloplast that supplies a statement on accounting procedures indicating how each entry is defined. Even if this may tell how this particular firm defines indicators, they are rarely directly comparable with other firms that may even use the similar names for their indicators. Even if there is some variation in terms of how it is possible to arrive at a profit figure in financial statements, there are some rules. This is not the case in intellectual capital statements, and it is possible to foresee a huge effort to develop accounting and auditing standards if intellectual capital reporting were made mandatory.

384

Table 3 The indicators of Coloplast’s intellectual capital statement Effects

97

98

99

00

01

4.26

4.31

–

4.2

3.73

3.79

–

3.78

Performance review evaluations

–

–

–

3.58

Absence of production employees

6.8

5.1

5.8

5.8

9.6 17.3

6.3 15.8

7.8 16.1

9.9 16.7

Staff turnover Salaried employees Production employees Employee satisfaction Denmark Other countries Number of unsolicited job Applications Salaried employees In production Customers Total customer satisfaction New product proportion of turnover Customer loyalty Processes Number of work related accidents with working days lost in proportion to hours (million) Complaints (index)

Variance on audit of quality assurance system Number of orders delivered on time (%) Technologies

3.59 –

450 2500

3.65 –

600 2600

– 3.58

820 2800

3.6 3.82

616 2426

4.3

Activities

97

Job rotation in % Training days per employee Training costs per employee

11 10 5.3 4 4541 4741

3.65 Proportion of performance reviews held in % 6.3 Proportion of employees having performance reviews with immediate superior in % Participation in job and education fairs 9.0 15.7

98

99

00

01

Resources

13 16 16 Number of employees 4.6 4.7 4.4 /– in Denmark 4056 5689 6855 Employees >3 years of further education 90 – % of salaried employees – 81 % of all employees

–

–

–

–

1

2

2

2

39

49

98

100

156

10

8

1

4

19

5

4.8

4.2

Production employees in self-managing groups (%)

97

98

99

00

01

2888/ 1476 223

3269/ 1683 253

3745/ 1974 337

3771/ 2048 –

4203/ 2281

44

46

62

–

15

15

18

–

40

50

60

60

65

122

143

167

170

180

2

2

25

26

– 3.75

677 2335

93.5

96.1

92

99.2

97.8

Meetings with users and health proffesionals (index) Numbers of customer satisfaction measurements

33.5

26.3

22.3

27.4

31.6

–

–

–

92

23

17

16

18

15

R&D costs as % of turnover

100

132

153

160

147

3

3

0

2

0

98.5

95.5

97.8

98

97.9

Number of products in development in accordance with Coloplast’s product development model New patent applications for the year Internal audits Costs of clinical documentation (index) IT costs in % of turnover

4.9

3.9 Total number of patent rights

12

17

40

52

46

Number of times a year that Lloyd audits

26

24

26

15

23

Number of internal auditors

75 100

75 103

67 113

– –

3

3

–

2.5

25

–

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Employees Commitment to job Relations between Responsibilities and skills

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Table 4 Reading Coloplast’s indicators 1. Resources Coloplast is a growth company not only because it grows employment (by 55% over the five years reported). It also grows other types if knowledge resources such as patents (48%). It also increases the share proportion of people that work in self-governing work teams (from 40 to 65%). In terms of knowledge resources, growth in employment is says very little specifically – it just says that the firm grows. But perhaps the growth in number of patents signifies growth in some of the technological dimensions of knowledge. Patents can be considered ‘packaged knowledge’. And perhaps growth in the adoption of the new organisational form self-governing work groups concerns the development of organisational competencies. 2. Activities Job rotation is put in place for about 10–15% of the workforce, and about 5 training days per employee are in place. The cost of training per employee is increasing slightly and perhaps a result of inflation etc. Thus, the activities to upgrade the workforce appear to be stable. The index showing meetings with users (focus groups) increases dramatically over the reporting period (about 500%) signifying a clear attempt at understanding user needs and ideas. Also, the growth in number of products developed according to a product development model is increasing (almost 400%), and it may be expected that new products fit organisational processes and marketing conditions. These indicators suggest that Coloplast pays attention to the development of organisational dimensions such as employee development, which appears to a durable mechanism in as much as it is kept in place as recurring practice to upgrade employee resources. Coloplast appears also to develop its customer-oriented competencies through establishing contacts with users groups. This may be one way to circulate knowledge about the products’ functionality. Possibly, it can help product development activities to be integrated in organisational competencies. 3. Effects The employee indicators show a high level of commitment (more than ‘4’ on a 5-point Likert scale), although staff turnover is also high (15–20% for production workers). Customer satisfaction is variable over the reporting period but always more than 90% and typically more than 95%. Also, the complaints index has been rising over the period (almost by 50%). The users generally accepted new products, as the share of revenues brought in by ‘new products’ is about 30%. Quality control appears to be in place as there are but few exceptions from the norms (between 3 and 0 over the years), and delivery performance varies from 95% to about 98%. These indicators show positive attention to customer-oriented and organisational competencies.

customer and employee satisfaction and are collected by questionnaires where respondents indicate on Likert scales 1–5 what their perceptions are. Other indicators are about number of patents, number of audits, breakdown of customer and employees, and yet other indicators are financial ones such as investments and expenses, and perhaps also market share. There is thus huge variation in definitions of the indicators themselves. They do not share a common material basis such as the receipt in financial accounting. How may this information be analysed? Table 4 offers our reading and we attach a commentary that points out the kinds of competencies that Coloplast reports.

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Clearly, there is a limit to how much insight this analysis can bring forward. This difficulty is due to many things including that the indicators are still embryonic to what they could be; and it is perhaps also due to the fact that we are not accustomed to reading such indicators and to attach meaning to them. In a sense, this interpretation makes the same general claims as can be found in management accounting and financial statements that also provide general propositions of problems and solutions. However, the question still is whether the analysis teaches us anything useful about Coloplast? Our interpretation suggests that Coloplast builds its organisation in three fields in particular that together constitute its network of knowledge. Through the table, it is possible to present Coloplast as a firm that focuses on systematic product development and patenting; it focuses on self-managing work groups in production; and it focuses on co-operation with customers and users. This conclusion stems directly from the indicators because more and more attention is placed on patenting and on devising a procedure for product development; more attention is put on the development of a particular work organisation (self governed work groups) and more attention is paid to meetings with users. The indicators in the intellectual capital statement signal these as the value drivers that the company monitors: co-operation with users, product development and self-managing groups. It is an open question whether such a story line satisfies a readership. It may be too general and it may be deemed untrustworthy because they are self-presentations of the firm due to lack of generally accepted principles for their construction. But it may be that irrespective of all these problems, the interpretation made may be more interesting than no interpretation at all. 4.2. The intellectual capital statement’s text There is much more than indicators to an intellectual capital statement. Coloplast’s intellectual capital statement comprises 20 pages most of which are examples of how priorities, strategies and processes are executed – typically related to the story of quality of life for users. In sections organised around customers, employees, society, and shareholders, the intellectual capital statement provides examples for example of how Coloplast invests in relations, how it develops procedures to support and develop recruitment, interactions with customers, product development and knowledge sharing. It also presents cases about users, just as it presents quotations from users and employees about their relations to the firm. In many respects this document appears to be a carefully constructed document that presents the firm as capable of producing quality of life. It makes a case for this by suggesting how its knowledge resources are held together and developed to take this challenge. To get an overview of the elements of the 20 pages, a reader may again wish to compress and see the elements of the text as something that can be represented. As suggested previously, such a representation can look at four elements: a knowledge narrative, some management challenges, some initiatives and some indicators. If read across, our understanding of Coloplast’s intellectual capital statement can be represented as follows along these four dimensions (see Table 5). This presentation is obviously very brief (see appendix for a more elaborate version). It suggests a knowledge narrative, which interprets the products – medical supplies – and the concern for quality of life. It is a narrative in the simple sense that it provides a line of reasoning where the firm’s activities are assembled and pointed towards a (future) situation where all the things that are encountered in the other elements – management challenges, efforts and indicators – help define and fill out quality of life. The narrative is a presentation of the elements of the management of knowledge for quality of life.

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Table 5 The content of Coloplast’s intellectual capital statement Value-proposition (knowledge narrative)

Management challenges

Efforts

Indicators

Quality of Life

Insight into users’ situation

Dialogue-groups Customer-satisfaction

# Groups # New ideas Satisfaction-measures Investments i QC

Quality control

Quality control systems

Q-performance Certification Complaints Self-organised WG

Research & development

Patenting investments

R&D expenses # Patents # New patents # New products Revenues/new products

New products

The presentation made in Table 5 illustrates how Coloplast connects the indicators to a story of how knowledge is supposed to work, and the numerical trends in the indicators help the reader determine whether the story line is credible. The indicators can only assess aspects of the status of activities because this is what they can describe. Whether patenting is actually a good impression of research and development or whether it is merely an indication of knowledge unrelated to the firm’s business cannot be ‘proven’ with certainty. Therefore the indicators cannot tell whether the whole story is true, but they may help a reader to get a ‘feel’ of the situation. If accepted, the stories presented in the text of the intellectual capital statement may gain credibility, or it may be open to critique. It could be a critique of whether the efforts put in place actually in some interesting way translates into the narrative. Why, some may ask, is the indicator of self-organising work groups related to quality of life? This requires an extended explanation. In this sense the intellectual capital statement may construct propositions about the firm; but these propositions can also be rejected by readers and possibly supplanted by other stories. 4.3. Relating indicators and text The two readings are related. Table 3 enables a distanciated reading where in principle it is possible to use the analysis to compare the firm with others, precisely because the analytical vocabulary is no longer specific to the individual firm. Comparability is thus potentially in place but obviously at the cost of not knowing the referent well. To get to know the firm, Table 5 can be mobilised. Combining these two readings there is both a disentangled and an entangled representation of the firm (Mouritsen, 2003, 2004). They are related, but not causally related. The indicators are loosely related to the firm’s knowledge strategy. Therefore the indicators mean different things if different explanations of how knowledge works. One suggestion is that patents are there to develop the firm’s critical knowledge; others may say that patents are there to bar knowledge from competitors. In the first instance, it may be possible to say that patents will produce quality of life. In the second instance, the firm prevents certain kinds of knowledge to be used and thus arguably it would not bring quality of life about. Likewise, it may be that training will improve the quality of a user’s life since employees will improve the quality of production. It may also

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mean, however, that the turnover rate is too high and that all this training is to bring new employees up to date all the time and suddenly training is a cover for defective HRM practices. This may not produce quality of life. Therefore the indicators and the knowledge strategy are loosely coupled. There are gaps open for interpretation, which makes the intellectual capital a fragile document. In principle, many can appropriate it.10 5. Discussion and conclusion: the contours of management control in the 2nd wave of knowledge management With the advent of intellectual capital, a management control agenda is added to knowledge management. The 2nd wave of knowledge management is concerned to make the transition from measurement to management around the use of information in intellectual capital statements. In the 1st wave, knowledge management – in particular in Nonaka’s view – concerns the single individual’s personal tacit knowledge and the subsequent problem to distribute such knowledge to other individuals in the organisation. There is a focus on creative individuals but it is not so clear what the role of the manager really is apart from establishing comforting and creative environments – including coffee bars and meeting spaces. However, how the manager would know when to invest more or less in coffee bars is difficult to know. In the 2nd wave, knowledge management is about management control where managers combine, apply and develop a corporate body of knowledge resources to produce a use value around the company’s services. The intellectual capital statement incorporates these and presents knowledge as a network of heterogeneous elements such as employees, procedures, technologies, and customers and users, and relates it to a corporate purpose. Here, the managers use intellectual capital information that allows a general reading of the firm’s situation. The intellectual capital statement creates a version of the firm that was not seen previously. It surveys the composition of, the investments in and effects related to knowledge resources. Knowledge resources can be tracked over time, and it is possible to engage in evaluative activities since it is then possible for managers and others to judge whether they like the development in resources and their use that has been made visible. Suddenly knowledge is not tacit any more and it is not outside the domain of direct management attention. Knowledge is translated into resources making it possible to perform management control in the sense of tracing, evaluating, changing and monitoring their status and effects. Knowledge has been made ordinary, and the prospect of a knowledge society is not daunting. It is easier to deal with Drucker’s (1993, p. 7) concern to find the production function of knowledge. The intellectual capital statement says that it is a network of knowledge resources organised around a purpose related to users, and the intellectual capital statement says that to understand this network its elements have to be made amenable to comparison and evaluation through indicators. Through intellectual capital information the advent of the 2nd wave allows management control to develop which translates information into management since the firm’s ability to act is metaphorically brought from the ‘darkness’ of the individual into the ‘light’ of the numbers where it is 10 It is interesting listening to different readers’ interpretation of Coloplast’s intellectual capital statement. Some believe it; others do not. On one occasion when we discussed it with shop-stewards, it was interesting to note that they could produce a series of accounts of how negotiations with management should proceed given the intellectual capital statement. They often differed as to what they thought were believable and not least in terms of how they thought shop stewards’ strategies should be laid out in this firm.

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subjected to a wide set of management activities. Refocusing knowledge management by means of intellectual capital statements allows management to exceed the individual’s sphere. Knowledge management is transformed into ‘playing a tune’ with the organisation’s knowledge resources. Within a management control context this implies that a range of phenomena, relations and incidents normally separated from each other in time and place as well as in logic and ontology are subjected to coordinated management measures with the proposition to produce a certain value for users of the company’s service. Knowledge is separated from the individual person and oriented towards other purposes. In the same way as financial and management accounting pull financial decisions out of the daily chaotic detail, intellectual capital statements pull knowledge management out of dispersed, chaotic dayto-day situations, compare activities in new ways and identify new or hidden relations. Subsequently, the new knowledge is ‘put’ back into the day-to-day decision situations. The result is some form of coherence across the organisation’s different knowledge resources, more opportunities for coordination and attention to the effects of knowledge management activities. In the case of Coloplast, the intellectual capital statement makes the claim that its intellectual resources are organised around the triangle ‘user needs-product development-quality’, and it suggests that quality of life is the ambition behind this. It also supplies indicators, which suggest that the firm gets more patents and develops its organisation towards one based on self-governing groups. Indicators also show that Coloplast builds relationships with users through focus groups, and indicators suggest that quality management is at a high level. These indicators may not stand for quality of life, but in being related through the triangular model, all elements of the puzzle get defined and refined. The relevance and trustworthiness of the intellectual capital statement is for the readership to determine. The readership determines how it wants to intervene either as managers to decide whether e.g. to increase the number of patents or not. Suppliers of resources may decide whether this is a risky firm (financial resources), a capable firm (a user/customer) or whether it will develop competencies (prospective employees). They are all interested in understanding the firm’s knowledge resources and they act on this understanding by changing the firm or adding to it. This is where the management control concerns for economising, organising and modularising knowledge are relevant. Economising asks questions about how much should be invested. In the case of Coloplast, it is clear that huge investments are committed to develop new products and a substantial part of annual revenues arise from new products. However, critical questions can be asked, e.g. whether it is possible to get economies of scale out of short product programmes? One wonders whether development work is too abundant. Organising asks questions about location of knowledge. Is knowledge in people, or in quality management systems? In Coloplast, it appears to be located more in systems and relations than in individuals. How does this influence the evaluation of risk? Modularisation concerns the ambition to predictably link various kinds of knowledge, and as the attempt to make product development into a much more systematic procedure, such concerns are present also from the pages of Coloplast’s intellectual capital statement. Intellectual capital information makes it possible for managers to intervene and make knowledge a manageable thing. Knowledge management may have an air of a frail discipline as it is concerned with people development and human resource practices. However, when intellectual capital is added, knowledge is translated into knowledge resources of various kinds around which managerial decisions can be made. The intellectual capital statement informs about the development of knowledge resources and allows general managerial

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questions to be asked about the composition, the development and the effects of knowledge resources in the firm. It is measurement that informs management activities.

Acknowledgements We acknowledge the very helpful comments provided by Per N. Bukh, Bill Nixon, James Guthrie, Mark Tippitt, and others including two knowledgeable anonymous reviewers to previous drafts to this paper.

Appendix A. Our interpretation of the text in Coloplast’s intellectual capital This presentation of Coloplast’s intellectual capital is an illustration of knowledge management strategy. It is our analysis of what the document says. Obviously, there may be alternative interpretations. It is our narrative of how Coloplast may be understood as a knowledge based organisation.

Coloplast’s knowledge management strategy To improve the quality of life for the disabled Helping people via disposable care products Coloplast’s mission is to develop, produce and market disposable care products that help the disabled to a better quality of life. Based on skin-friendly adhesives Coloplast develops innovative, knowledgeintensive and safe products. These include ostomy care products to people who have had part of their colon removed and their intestine re-routed to an outlet (the stoma) in the abdominal wall, continence care products for people with involuntary urination and wound care products for people suffering from chronic wounds. We also make preventive and curative skin care products, special dressings for the OTC market as well as breast forms and textile pads for women after breast surgery. A physical handicap limits self-realisation Living with a physical disability means having to accept constraints on self-realisation. Many things get far more complicated when somebody is physically disabled. Living a close to normal life takes practice, and in many situations the disabled person depends on the help of others. Vulnerability, lack of self-confidence and worrying are often experienced, and these feelings sometimes take predominance over life. As a result of unnecessary constraints the disabled individual is prevented from enjoying the positive and rich life to which all humans should be entitled.

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Safe products that are easy to use yield freedom In order to help improve the quality of life of the physically disabled, Coloplast must be able to produce and deliver disposable care products that are safe and easy to use. Easy to use so that the product requires as little attention as possible from its users. And safe to use in order that users should not have to worry about possible leaks and any ensuing inconvenience or physical and psychological discomfort. In other words, our overall concern in trying to help the physically disabled to an improved quality of life is to offer convenient and reliable products. Thus, users should be able to live their life without being constantly reminded of the product and their disability. Coloplast aims to reduce as much as possible the physical and psychological constraints of our disabled users. How to get to know the user and map out his needs For Coloplast to develop and bring out the products that will help the disabled obtain an improved quality of life, we must acquire a deep understanding of the physical as well as the psychological aspects of living with a disability. This insight is created through dialogue groups of users and health professionals based on our attitude that it takes personal experience to convince. We firmly believe that only by building on personal experience will we be able to separate the essential information to be used for planning our innovative and developmental activities. In continuation of this proximity with users, it is clear that research and development in products, processes and high technology are crucial to our endeavours to help the physically disabled obtain an improved quality of life. There is a great potential for further improvement in the quality of life of our users by developing new materials, and by putting more and more knowledge into our products. Likewise, there are many more disabilities whose constraints and discomforts can be relieved through disposable care products based on the skin-adhesive technology if only these products are developed. The point of departure for process development is our work with quality issues, for which we obtained not only a quality award, but which structures the development of our manufacturing processes. Quality is at the centre of all our efforts to match every development of the production processes, the organisation and staff with getting it right each and every time. Quality and innovation are key issues in our efforts If quality, innovation and understanding of the daily issues of users are so crucial to our efforts to help the physically disabled to obtain an improved quality of life, it presupposes the support of a culture of delegated responsibilities that rewards individual initiative. It is also essential that our ability to interpret user needs is widely appreciated and that we are recognised as a reliable business partner. In our culture we emphasise innovation and support knowledge sharing, for example by means of interdisciplinary project groups, self-managed teams and job rotation.

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Our ambition to improve the quality of life for the physically disabled raises central management challenges to Coloplast in developing a strategy for our intellectual capital. More specifically, our management challenges at Coloplast focus on: • Being able to understand the most important physical and psychological needs of users. Establishing dialogue groups and personal contact to users and health professionals achieve this. • Ensuring low rejection rates and reliable delivery through comprehensive QA for standardised processes, process improvement and development activities. • Creating a culture to sustain knowledge sharing and to support product and process development. • Building a working environment that will ensure the best development of staff by means of job rotation, self-managed teams, supplementary training and social responsibility to ensure the best development of our employees.

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