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37,4 Value-added knowledge
management for financial
performance
484
The case of an East Asian conglomerate
Ravi S. Sharma
Wee Kim Wee School of Communication & Information, Nanyang
Technological University, Singapore
Priscilla Teng Yu Hui
Ministry of Education, Raglan Grove, Singapore, and
Meng-Wah Tan
National Trades Union Congress, Jalan Bukit Merah, Singapore
Abstract
Purpose – This paper aims to study the economic significance of using a blended business and
knowledge strategy through the lens of conventional financial management before and after the
implementation of KM initiatives in a knowledge-intensive, high-growth firm that had gone through
business diversification through organic developments as well as mergers and acquisitions for over a
decade.
Design/methodology/approach – The economic value added (EVA) method is proposed as a
measure of the effective usage of capital funding in the firm before and after its KM program. The
extent of the economic impact due to the contributions of various KM strategies was analyzed using
standard financial management reporting. This enabled the derivation of follow-on KM initiatives that
were consistent with the target objectives.
Findings – The EVA method was found to be valid and credible in determining the net impact of
various KM initiatives. This was in a form that was comprehensible to top management and KM
decision-makers.
Research limitations/implications – Knowledge management as a strategic imperative has
gained significance over the past decade for its ability to handle the complexity of information to
further create, transfer and reuse intellectual capital. More importantly, KM is seen as the key business
enabler across different enterprises for its ability to enhance competitiveness and shareholder value.
The EVA method used in this paper has allowed the valuation of KM initiatives.
Practical implications – The emergence of KM as a blended business strategy has hence proved to
be vital for the sustainability of the knowledge-driven business model that looks beyond the physical
and financial into intellectual and social capital.
Originality/value – The paper presents a longitudinal case study of a fairly large East Asian
conglomerate.
Keywords Knowledge management, Intellectual capital, Financial management, Economic value added
Paper type Research paper
VINE: The journal of information and This work is reported as part of the ongoing efforts of the Knowledge Management Program at
knowledge management systems
Vol. 37 No. 4, 2007 NTU. The authors would like to thank their industry collaborators – who must remain
pp. 484-501 anonymous for reasons of confidentiality – for giving them this opportunity to conduct the joint
q Emerald Group Publishing Limited
0305-5728
research. Many thanks are also due to their colleagues Margaret Tan and Miguel
DOI 10.1108/03055720710838542 Morales-Arroyo for their collegiate contributions.
Introduction Value-added
The knowledge economy is growing rapidly with investments heavily focused on knowledge
technical know-how and financial engineering that restructure businesses of the old
into synergistic and competitive enterprises (Nonaka and Takeuchi, 1995; Davenport management
and Prusak, 1998; Senge, 1999). Globalization brings upon the flow of goods, services
as well as knowledge across borders whilst competing with international performance
benchmarks (Kermally, 2001). There is a need to continually review conventional 485
business strategy in managing businesses in such a global and knowledge-intensive
climate. Not least because knowledge (as opposed to plain data and information) has
been increasingly recognized as a primary source of competitive advantage over
traditional factors of production, such as labor, raw materials and financial capital
(Tissen et al., 2000; Sullivan, 2001; Maddocks et al., 2004).
However, knowledge (even when it is explicit rather than tacit) is fluid and this
unique feature makes it difficult to quantify in conventional financial management and
hence to justify its value in metrics form. The intangibility of knowledge can be further
explained in terms of intellectual capital (IC). In a pioneering work, Stewart (1999)
defined IC as “the intellectual material – knowledge, information, intellectual property,
experience – that can be put to use to create wealth” and essentially made up of human
capital (HC), structural capital (SC) and customer capital (CC). HC is the knowledge,
skill and experience of the employees within an enterprise; SC is the organizational
structure, technology and professional systems that remain within the organization;
and CC (which is often seen as a sub-set of SC) is the relationships the enterprise enjoys
with its customers. Broadly speaking, KM initiatives may also be considered part of an
enterprise’s IC – either human (tacit knowledge) or structural (explicit knowledge)
capital. More formally, IC refers to the knowledge, skills and technologies used to
create a competitive edge for an organization. IC captures the soft and intangible part
of the value of the company in addition to the traditional balance sheet (Bucklew and
Edvinsson, 1999). The benefits of having substantial IC in an organization are
improved productivity, greater innovation, new thinking and of course, increased
economic value.
In totality, the IC of an enterprise may be generally taken as the difference between
its book and market value (Edvinsson, 2000; Turner, 2000; Bontis, 2001). However,
taking the difference between the book and market values as a proxy of IC within the
enterprise may serve to highlight the knowledge-intensity of the enterprise but should
not be taken as a measure of IC per se. An enterprise’s book value is just a reflection of
its historical assets costs, while the market value is a reflection of future earnings and
growth of the company as well.
Many attempts have been made to explain this difference between book value and
market value – some of the more popular methods being the invisible balance sheet,
the intangible assets monitor and the balance score card (cf. Steward, 1991; Brooking,
1998; Bucklew and Edvinsson, 1999). Using Stewart’s (1999) definition, the difference is
typically attributable to “. . . the intellectual materials that have been formalized,
captured and leveraged to create wealth by producing higher-valued assets”. However
most of these measurement methods have failed to present the full and comprehensive
returns of IC (or intangible assets) in part because top management of enterprises have
not understood their implications (Turner, 2000; Tissen et al., 2000; Maddocks et al.,
2004) let alone replicate, leverage or reuse such resources.
VINE Recognizing the importance of IC to modern businesses and the need to manage it
37,4 with KM in order to create a blended strategy calls for the need to measure and exploit
the value of IC. But as Malhotra had remarked:
Measurements of organizational value in the current business environment using traditional
accounting methods is increasingly inadequate and often irrelevant to real value in today’s
economy.
486
The importance of the value inherent with people skills, learning capabilities and
expertise as well as the value in the network of relationships among individuals and
organizations are not reflected in conventional accounting practice.
This paper hence attempts to understand this gap with an analysis of the value of IC
and its impact on the business strategy of a knowledge-intensive enterprise. Through
the lens of conventional financial management, techniques such as the weighted
average cost of capital (WACC) and economic value-added (EVA) of a firm are used to
study the financial health and efficiency used of funds used for investments and
growth (cf. Bontis, 2001; Sullivan, 2001). A case study methodology based on the
grounded theory of IC management was used to track a large, knowledge-intensive,
multi-national corporation headquartered in Hong Kong in its KM journey.
The remainder of this paper is structured as follows. The next section reviews the
literature in KM strategy, IC and financial techniques for justifying IC. The concepts of
an IC multiplier and economic value-added (EVA) (Steward, 1991) are used to justify
the significance of aligning KM closely to the business strategy in order to increase the
value of its investments. The case background section describes the context and the
methods used in deriving the EVA measure as the basis of ex post comparison (that is,
pre and post evaluations) of NWDC before and after the KM initiatives. In the findings
section, these results are tabulated in order to summarize the present stage of KM
initiatives in NWDC and the effect on the value of EVA five years after the
implementation of the KM programs. The discussion section will scrutinize the extent
to which KM was critical to the business of NWDC in its growth strategy. KM
strategies to enhance further incremental values of IC leading to effective usage of
funds can also be quantified using the same EVA techniques. Finally, we conclude
with some thoughts on the scope and practicality of adopting value added knowledge
management in the field.
Literature review
Green (2006) insightfully suggests that “to define and manage knowledge, it must be
known within the context of the business enterprise, what is to be done with them”
echoing Stewart’s (1999) earlier axiom for measuring and deriving value from
knowledge. This, in essence, is known as the knowledge strategy of the enterprise. To
increase the probability of adding value, successful businesses articulate the link
between the strategy of their enterprise and what its workforce needs to know, share
and learn to execute the strategy (Green, 2006). Strategy – which is after all the
identification of the desired future state, specific objectives to be obtained, and the
action necessary to achieve the objective – ideally includes all major strategic areas,
such as markets, suppliers, human resources, competitive advantages, positioning,
critical success factors and value chains (op. cit.). However, Zack (1999), in an empirical
study of knowledge strategies in over 20 knowledge intensive firms, concluded that the
misalignment of business and knowledge strategies was a fairly common cause for Value-added
poor performance – for example, businesses that did not know when value was being knowledge
created and did not organize themselves and their partners to continually exploit this
value in the marketplace. management
This challenge is in part due to the inability of many enterprises to measure and
hence recognize the value of knowledge. Davenport and Prusak (1998) described
“knowledge as a fluid mix of framed experience, values, contextual information and 487
insight that provides a framework for evaluating and incorporating new experiences
and information.” It is a higher and extrapolated level of data and information.
Knowledge exists “between the heads of people” and remains within an enterprise
“when everyone goes home”. It is such serendipity associated with knowledge that
makes it a challenge to manage aptly and reuse it effectively. The relentless leverage of
core knowledge in the management and growth of an enterprise allows it to sustain its
competitive edge. This is the alignment of business and knowledge strategies.
According to Callahan (2002), “a knowledge strategy refers to the identification of
valuable knowledge assets and to the implementation of the business initiatives that
leverage and develop these assets with a view to improving organizational
performance”. It is unnecessary to differentiate between “knowledge strategy” and
“KM strategy” from a practitioner’s perspective as it is difficult to separate the act of
identifying critical knowledge and the act of implementing knowledge initiatives to
close the knowledge gaps. A knowledge strategy hence consists of: the knowledge
framework, knowledge environment, and knowledge initiatives. The knowledge
framework is to provide a conceptual understanding of knowledge management for the
people in an organization. The knowledge environment provides the optimum
conditions in which knowledge processes (for example, creation, organization, search
and reuse) can flourish. A knowledge initiative is a group of activities designed to
provide business value while enhancing the overall knowledge environment. Some
examples of knowledge initiatives include mentoring, leadership training, knowledge
sharing, document and records management, competitive intelligence, search and find,
lessons learned, communities of practice, expertise locator, innovation management,
workplace design, recruitment, training and education, and so on.
The measurement and valuation of IC allows organizations to establish the impact
of knowledge initiatives and hence the alignment of the knowledge strategy with
business objectives. The role of strategic management is to set in place the necessary
structure for individuals to collaborate in a way that leverages their talent and existing
market opportunities in order to create economic value. Some ways in which such
necessary structure can be put in place in an organization is through: the
reconfiguration of existing systems; the creation of a learning organization; the
investment in training and coaching employees (Bucklew and Edvinsson, 1999;
Maddocks et al., 2004). To achieve what is known as an IC multiplier effect,
organizations should concentrate on getting a higher leverage of HC through
improving their SC (Sullivan, 2001).
It has also been shown that the growth curve of IC in an organization can
significantly impact its market capitalization growth (Edvinsson, 2000). There are
typically four phases to such growth curve with each phase often resulting in “a stock
market appreciation shift, based on increased transparency, as well as new
expectations from the future value creation of the intangibles investment”
VINE (Edvinsson, 2000). Figure 1 illustrates the four phases of growth described by
37,4 Edvinsson. Phase 1 – IC visualization – focuses on assessing an organization’s state of
IC which can be from three perspectives: on the present efficiency of the intellectual
capital, on the company’s efforts to renew and develop its intellectual capital, and on
the risk that the present efficiency will decrease. Phase 2 – human capital injection – is
also known as competence adding where talented employees are identified and
488 promoted in the organization, and effectiveness from knowledge sharing or emerging
knowledge exchanges are sought. Phase 3 – HC to SC transformation – is very much
focused on the packaging of knowledge into a coherent business idea and strategy to
be shared throughout the organization with a shift of leadership focus from HC to SC as
a multiplier for human talents. The potential earnings for the organization are much
more at this phase. Finally, phase 4 – structural capital injection – is achieved by
combining different types of SC constellations for co-creation of new opportunities. For
example, an M&A combines two organizations with different SC and CC components
to achieve potentially greater synergy and market share. A common theme that
permeates all four phases is the challenge and mechanics of measurement and
valuation. This is the focus of the case analysis that is described later in this paper.
Among the numerous approaches suggested in the literature (cf. Bontis, 2001 for a
comprehensive review) are: Tobin’s q from accounting and finance which is a ratio that
measures the relationship between a company’s market value and its replacement
value (i.e. the cost of replacing its assets); revenue per employee which is used as a
yard-stick to assess the financial performance of companies ranging from Nike to
McKinsey; training and/or R&D budgets; licensing revenue from patents inventions;
exploitation ratios which compare the value of a company’s IC with its actual relative
performance; an IC idex which incorporates cost, market and income approaches that
measure growth and performance; the intangible asset monitor of external structure
(e.g. brands, relations), internal structure (management, systems, organization) and
individual competence (education, experience) using growth, efficiency, stability
criteria; and citation weighted patents which assess the impact of R&D which created
IP with indicators such as R&D expense per sales dollar, number of patents, income
Figure 1.
Market capitalization
value over time
per R&D dollar, cost of patent per sales dollar, project LC cost per sales dollar . . . Value-added
citations as “evidence of technological output and information flow”. knowledge
The idea of an EVA analysis came about precisely under these circumstances of
measurement and valuation for investment and growth strategies. “EVA focuses on management
the managerial effectiveness in a given year. It measures the business’ true economic
profit and ignores the accounting profit. Economic profit implies the residual income
generated from a division or project after the cost of capital for that division or project 489
has been paid off” (Steward, 1991). More formally, EVA measures a firm’s effectiveness
in increasing its value during a given year. It is calculated as follows:
EVA ¼ NOPAT 2 Total net operating capital £ WACC ð1Þ
where NOPAT is the net operating profit after taxes and WACC is the weighted
average cost of capital. Operating assets in place represent the amount of capital
invested in the company’s existing operating assets obtainable from the balance sheet.
EVA is hence a measure of residual income, which focuses on the notion that a
company must earn an adequate risk-adjusted return on its investment in assets. More
simply, EVA measures the income from a company’s operations that exceeds the
risk-adjusted cost of investment.
NOPAT is calculated in the following equation (2):
NOPAT ¼ EBIT ð1 2 Tax rateÞ ð2Þ
where EBIT is the earnings before income and taxes obtained from the income
statement and the tax rate for the jurisdiction used in the case analysis (HK SAR) is
fixed at 16.00 percent.
WACC is the weighted average cost of capital for the funds used to finance a
particular project. Simply, it is the cost required to mobilize the funds and is calculated
in the following equation (3):
WACC ¼ Cost of equity þ Cost of debts ð3Þ
where cost of equity is the cost of issued stock and the cost of debt is the cost of
borrowings – all of which the data are obtained from the income statement. A point to
note is that in the calculation of WACC, the derived value of WACC has taken market
risks into consideration. In other words, the economics mechanism of market
fluctuations that account for the Hang Seng Index in Hong Kong was taken as a factor
in WACC. Hence, the final derived value of EVA has incorporated the overall market
risks in the economy as recommended by Steward (1991).
Bontis (2001) describes EVA as providing “a common language and benchmark for
managers to discuss value-creation and it is blessed with widespread acceptance in the
financial community, can increase the legitimacy of a company in the eyes of financial
markets, as a valuable measure of corporate value-creation or destruction over a
period”. The fundamental strengths of this approach are its seemingly good correlation
with stock price and a connection between financial planning, budgeting, goal setting
and compensation). A positive EVA indicates that a company is earning a positive
economic return over its accounting profit. This positive economic return (which is not
indicated in accounting book) is due from the efficient usage of funds which can be
coined as the benefits from the IC in the company. Expectedly, such a listed company
VINE would command a higher price for its stock. While by no means the only available
37,4 method of measurement, EVA is intuitive in its appeal to IC valuations because the
intrinsic, intangible and esoteric aspects of a business are captured by their resulting
effects rather than their contributory capital. Hence, the EVA approach is the preferred
choice as the valuation criterion in the case analysis.
A word on lean management may be appropriate before we close this section. Lean
490 operating principles began in manufacturing environments. It is commonly believed
that “lean” started in Japan (Toyota, specifically), but Henry Ford had been using parts
of the lean philosophy as early as in the 1920s. A lean organization is customer-centric,
is committed to continuous improvement and has an efficient infrastructure, a culture
that abhors waste and a fierce dedication to excellence. It consistently meets or exceeds
all of its core success measures. It invests its resources only where there is a clear
financial advantage. It is a systematic approach to identifying and eliminating waste
through continuous improvement, flowing the product at the pull of the customer in
pursuit of perfection. The wastes are referred to as non value-added activities namely,
overproduction, waiting, transportation, excess inventory, defects, excess motion and
under-utilized people. Both KM and EVA are wholly consistent with the lean
philosophy. Knowledge that is not reused is wastage. Investments in such HC
(particularly if non-transferable to SC) are inefficient. Sustainable competitive
advantage calls for an enterprise to put in place a knowledge infrastructure (strategies,
processes, people and technologies) that leads to continual improvement in eliminating
such wastage.
Case background
The case study was conducted using an enterprise that was particularly suited to the
EVA analysis described in the previous section. It has to be large and
knowledge-intensive so that we could study the EVA impact before and after KM.
Data, information and executive time must also be readily forthcoming. More
specifically, of interest was whether true value could be derived from a slew of recently
concluded KM initiatives. The New World Development Company Limited (NWDC), a
large, multi-national corporation headquartered in Hong Kong SAR seemed amenable
to such analysis. Established in 1970, NWDC has been listed in Hong Kong since 1972,
and is now a constituent stock of the benchmark Hang Seng Index with a total asset
value exceeding HK$117 billion.
After more than 30 years of operations, the group has expanded from its original
property business to include four core businesses, including property and hotels;
infrastructure; services; and department stores in Hong Kong, Macau and Mainland
China. This was through an eclectic combination of organic business development,
mergers, acquisitions and strategic partnerships. The group is also involved in a
number of strategic investments in Southeast Asia. NWDC had been riding on the
property boom in these countries until a “wake-up” advisory by investment analysts
Smith Barney in 2000 who criticized NWDC for failing to keep its promise to focus on
leveraging value from its core business in property hence leading to a wider discount to
net asset value (NAV). This was closely followed by another similar advisory, this time
by Goldman Sachs which faulted NWDC’s business strategy for giving conflicting
guidance on the company’s financial performance and being unsure of its directions.
Figure 2 shows the organization chart of the enterprise. In 2000, NWDC was in the Value-added
throes of a quagmire. The increasing complexity of running their expanding business knowledge
with recent and ongoing M&A left an almost dysfunctional knowledge and
information infrastructure. NWDC hence responded to the analysts’ criticisms by management
re-visiting the company’s objectives and business strategies. The top management of
NWDC particularly recognized that business and product information was moving
faster in the knowledge era and they needed to have a more cohesive system to manage 491
all their business divisions effectively. One of the major responses was the
implementation of the KM initiatives top-down across all business divisions as part of
a linking up of all disparate information and had a more effective channel to
disseminate the company’s business objectives.
In such a “classic” situation, three major problems are typically perceived,
particularly with tacit and explicit knowledge sharing (Arcplan, 2007). The situation at
NWDC in the year 2000 was no exception.
Figure 3 summarizes the net result of these three problems. The first was that there
were fundamental gaps in the entire reporting process. Financial managers at the
corporate headquarters were not receiving the accurate, timely, seamless and regular
reports and analysis that they required from the divisions and subsidiaries. Hence,
there was little sharing of experience. The second was the equally frustrating inability
to drill into meaningful details from the multitude of disparate financial systems that
served the different divisions and subsidiaries. In the financial consolidation and
Figure 2.
Corporate structure of
NWDC
VINE
37,4
492
Figure 3.
Enterprise entropy and
knowledge attrition
closing cycle for example, sometimes multiple enterprise resource planning instances
are involved, one or more financial consolidation and management systems, multiple
data collection systems, legacy data-marts and warehouses as well as dozens of
mission-critical spreadsheet applications. Hence, financial aggregation and
consolidation were often achieved via a tedious and complex step-by-step process
involving intermediate spreadsheet solutions, financial modeling tools, data extraction
routines and financial data management solutions. This made for inadequate
understanding and imperfect decision-making. The third problem was with the
difficulty of calculating meaningful performance ratios from financial and operational
metrics. The most fundamental key performance indicators (KPI) for any large
corporation such as NWDC was to measure how well managers across the enterprise
are managing their area in relation to overall corporate performance. For example –
what effect are customer turnover having on the profitability of a particular line of
business? Are staffing levels optimized to take advantage of peak revenue periods? Do
materials purchases match bookings? The inputs to these measurements typically
reside in many different financial and operational systems. Due to the complexity of
the calculation itself, they are multi-step calculations which also require the application
of business logic (e.g. if customer ¼ “key account” then process under favorable
terms) and equally critical is their interpretation in the context of the business climate
(not all key accounts are similarly defined and handled). The end result is inevitably a
whole series of uncertainties and imperfect knowledge seeking and sharing . . . all
indicated by “?” in Figure 3.
Given such a current situation in the year 2000 and with open criticism from
investment analysts regarding its unhealthy financial and operational performance, it
was unsurprising that NWDC’s top management decided to re-assess their business
strategy across their subsidiaries in the various business sectors to see if they could
achieve greater efficiencies and economies of scale so as to boost their financial
performance. The top management discovered that one factor that was contributing to
the lower than expected performance was the lack of a more coherent KM strategy that
was aligned to their business strategy of diversification. The gut feeling was that
despite the flurry of M&A activities, NWDC did not really profit from the sum of its
subsidiaries’ HC and SC. In the ideal case, the whole would be greater than a sum of its Value-added
parts – a concept known as leveraging. knowledge
In fact, pockets of KM existed within certain parts within NWDC but the benefits
from these KM initiatives were not shared with other group companies nor cascaded to management
every employee. The “reinventing the wheel” scenario happened repeatedly especially
between complementary sectors such as property and construction. Also, the
knowledge assets (artifacts, skills, heuristics, experience and natural talent) within the 493
various companies were not coherently and cohesively managed such that wastage of
time, money and resources were reduced. This was hardly beyond the IC visualization
stage of attaining shareholder value and NWDC was under tremendous pressure to
rectify this apparent chaotic knowledge sharing.
After such a blunt re-assessment, NWDC’s top management decided to set up a high
profile knowledge management department (KMD) to put in place a more coherent KM
strategy that could better integrate and leverage on the collective intellectual capability
of its employees. The KMD crafted out a knowledge framework to cascade to all
employees so that everyone had a common understanding of what the grand plan was
about. With the sponsorship of top management, knowledge initiatives were
implemented to enhance the exploitation and reuse of HC and SC so as to bring about
increased knowledge mobilization and diffusion within NWDC. Accordingly, some
performance measures and targets were identified.
Table I shows some of the major KM initiatives that NWDC implemented in year
2000 grouped according to their impact on human and structural capital. The exact
details are beyond the scope of this article and remain classified due to the competitive
nature of the business. Suffice to say, they were pervasive in the sense that all divisions
and geographies were mandated by headquarters to conform to the new way of doing
things, and almost all complied in good time. They were also holistic in that they
It is apparent that in order to increase the value of EVA, NOPAT has to increase and at
a scale bigger than the value of total net operating capital £ WACC in order to have a
positive EVA, which indicates corporate value creation or incremental IC. In financial
terms, to increase the value of NOPAT, simply increase revenues and reduce expenses.
This objective was achieved by blending KM strategy into NWDC’s current business
strategy as KM served to manage effective knowledge flows within the organization
and thereby provide a more conducive environment for innovation and efficient which
in turn enable an increase in revenue and reduction in expenses. This will be explored
further in the concluding section.
The other means of increasing the value of EVA is to reduce total net operating
capital and the WACC. Similarly, this was achieved by implementing KM into NWDC.
KM strategy such as adopting the lean concept would improve the efficiency of
business processes thereby cutting down wastage and hence reducing the total net
operating capital. This was validated in the calculations of EVA value for FY 2005.
Five years after the implementation of the KM initiatives within NWDC, a similar EVA
analysis was performed to NWDC across their business divisions. From Table III, it
can be clearly seen that all except the property division reflected a positive value of
EVA. The positive EVA reflects that NWDC was starting to create corporate value in
utilizing its resources instead of destroying it as in FY 2000. As there were no other
structural or external changes, this movement was interpreted by management as a
significant contribution of their KM initiative and its alignment to their business
strategy. Top executives felt that NWDC was not only reaping the benefits of its group
IC but leveraging it with its KM programs driving its business objectives.
Most of the value increase was attributable to the transformation of HC with a
flexible organization design. In the agile organization, there are three kinds of
flexibilities – functional, numerical and financial. Under relevant training in NWDC,
employees had become multi-skilled and were re-deployed quickly from one project
role to another. For example, project managers in NWDC’s property division do not
only possess project management skills but were crossed trained in twinned field of
expertise – sales and marketing. This allowed them to bring value to the firm by
up-selling during the life of a project when they interacted with potential customers.
NWDC believed this would inevitably connect and turn more of their HC into relevant
SC and finally expand their social capital through their network in establishing their
brand name.
The KM strategy for numerical flexibility (the number of employees who can be Value-added
quickly increased and reduced to be in line with changes in market demand) was knowledge
applied to NWDC’s property and construction divisions. For example, apart from the
managerial level, the other site supervisors that are required by the building authority management
such as resident engineer, clerk-of-works and builders were on contract basis. The
high-value consultants such as the Architects and Engineers were outsourced and their
services were competitively procured. This gave NWDC the organizational flexibility 497
in managing its headcount as dictated by market demand. Only the core managerial
group remained as full-time staff and it was critical that they had access to all
knowledge flows and directed its sharing across divisions and subsidiaries. This
practice gave huge numerical flexibility to NWDC as the consultants and on-site staff
typically forms 80 percent of the workforce in any particular development.
The third factor of agile organization design is financial flexibility that refers to the
salaries and wages (expense) levels that can be adjusted quickly according to the state
of demand and supply in the labor market. Note that decreasing expenses is one
technique that increases the value of EVA. NWDC adopted the project bonus scheme to
both its full-time and the contract staff. For example, NWDC negotiated all its building
contracts by dangling a substantial project bonus for specific target objectives –
typically quality measurements by the building authority – and a more competitive
fixed amount. Naturally the rewards were greater to NWDC than to the recipients of
such bonuses. For builders, it can amount to 10 percent of their building contract.
However, an excellence endorsement by the building authority also ensured good sales
and profit for NWDC. NWDC was able control costs by economies of scale – being one
of the larger developers in the market – and developed deep market knowledge about
suppliers as well as work processes.
A point to note on the value of EVA for the property division was that it still
remained negative in FY 2005. Theoretically, this implied that the property division
was still not increasing its IC through the KM strategy that had been implemented
since Year 2000. However this was not necessarily true as the entire NWDC Group was
enjoying the returns of its IC and hence showing the success from its KM programs.
The negative EVA for the Property Division should instead be analyzed by examining
the individual components of EVA. As described earlier, in order to achieve a positive
EVA, technically, NOPAT has to be greater than its Total net operating
cost £ WACC. The nature of the property business is such that it is common for a
company such as NWDC to hold on to numerous and expensive land prior to a high
value development project. This requires a strategic and keen exchange of market
knowledge among divisions such that the Group profits from the loss of one or more of
its subsidiaries – the profit naturally being greater than the sum of losses. In financial
terms, the cost to hold on to the land is attributed to the Total net operating cost. Hence
the bigger the land bank, the higher its total net operating cost.
In the final analysis, though top management was convinced that the significant
boost in NWDC’s financial performance could be attributed to the implementation of
KM programs over five years, it was also accepted that these initiatives were mainly
focused on acquiring HC and CC (through M&A activities) and the transformation of
HC into SC. In the concluding section, we shall discuss some of the softer KM strategies
that NWDC can implement to tie in with their current setting in lieu to improve on the
VINE other two components of IC – the HC and CC – using the IC multiplier effect mentioned
37,4 in the literature.
Concluding remarks
The growth of IC most often leads to improved productivity, greater innovation, new
thinking and of course, increased economic value for an organization. As seen from
498 Table I, the KM initiatives implemented by NWDC involved the improvements made
on the human and structural capital aspects of their organizational IC. During the
course of the KM initiative (2000-2005) NWDC was between phase two (human capital
injection) and phase three (systematic transformation of human capital into structural
capital as a multiplier) of the growth curve of IC in an organization that was adapted
from Edvinsson (2000) in Figure 1.
Though the financial benefits from the implementation of these KM initiatives are
substantial, the management of NWDC felt more could be done to improve on their
human capital and customer capital to achieve a greater IC multiplier effect and thus
greater financial performance.
Table IV shows the list of KM strategies that NWDC seeks to implement to link
their current HC to SC using the IC multiplier effect. In the years 2000 to 2005, NWDC
had successfully integrated their KM initiatives into their overall business strategy of
greater performance (as validated by the increasing EVA for that period). Now, it was
felt that by leveraging on the IC multiplier effect, NWDC could generate corporate
value by greater SC injection (including the involvement of customers and strategic