In MBA research at Milpark Business School in 2011, Hlayiseka Ace Shikweni found that mining managers are aware of the value of intangible resources, including intellectual capital, and aware that they have these resources at their command, but he found that managers lack capacity to leverage these intangible resources.
Labour spirited detractors of the capitalist system, appear to have as much of a ‘blind spot’ for human capital, as capital-minded multinationals do, writes Shikweni.
Among the debates that shaped South Africa since the advent of democracy, our resolve to implement various forms of redress, indiginisation and ‘nationalisation’ is the weightiest debate.
In the midst of this debate, what is forgotten is the value of intellectual or intangible resources like skills, education and knowledge in our mines.
Some debaters seem to ignore the fact that intellectual capital is earned by individuals, not declared by governments. There is hope for more common ground if the debate could shift to human capital. The state had already nationalised mineral resources, but resources do not map, mine, extract, beneficiate, market or move themselves.
Shikweni also found that managers were aware of links between intangible resources and competitive business advantage, but managements made no collective effort to retain their best employees.
Managers want competitive business and production advantage, but are reluctant to leverage intangible resources in their organisations.
Shikweni’s MBA research found that employers should learn how to capture intellectual capital of employees.
Employees value, and expect, their own employability, not sheltered employment. Unlike past generations, employees now operate from a ‘quid pro quo’ perspective in which they demand value received, for value given.
Employers therefore have to perform their functions at a level of excellence, if they expect to get excellent performance from workers.
Companies should find ways to engage employees so that their hearts, minds and souls are commtted to corporate goals. This finding agrees with the ‘engagement’ management school of thought.
Shikweni’s research validates what Nobel Prize winning economist, Gary S Becker, wrote in Business Week; “Human capital is as much as part of the wealth of nations as are factories, housing, machinery, and other physical capital”.
The current nationalisation debate focuses on factories, housing, machinery, pay and other physical capital, but relegate intangible resources to back benches.
Workers should be recognised for their dramatic increase of knowledge, and should be given access to knowledge, scope to practice skills, and to apply skills at work.
Some managers are ignorant of intangible resources that underpin competitive advantage. They don’t know that companies that value this resource gain a competitive advantage in the market place.
On the other side of the coin, there are managers who seem to know the vital role played by tangible resources in an organisation and yet, many operational decisions neglect the noble role played by intangible resources.
Other research has shown that intangible resources are more likely than tangible resources to produce competitive advantage. Proponents of resources based perspectives posit that intangible resources play an important role in the creation of competitive advantage because they are not being consumed in use.
The study found that managers understand the role of intangible resources that lead to the enhancement of competitive advantage at a coal mining group. “It is important to note that the company’s retention strategy of skilled employees is at a low ebb, and the process of recruiting knowledge and skilled worker is underutilised”.
Skills rationale versus X-inefficiency
Organisations with a winning formula are those organisations that acknowledge that employees are both appreciating assets to be developed and depreciating cost to be managed.
A company that prioritises tangible resources over intangible resources could lead to what Davies and Lam (2000:524) call X-inefficiency, where an organisation incurs higher costs than necessary, given the set of plant and equipment in use, and its level of capacity utilisation. When intangible resources are not recognised, X-inefficiency sets in.
Today’s ‘new employment contracts’ allow skilled and experienced employees to leave without any attempt from the company to retain them. More often than not employers struggle for up to six months to fill vacancies before maintaining the normal performance level.
When dealing with resources, it is of paramount importance to heed the warning that was sounded by Hall (1993) that “intangible resources of know-how, culture, or networks which are people dependent and which can potentially ‘walk away’. When employees leave a company to join its competitors, they take with them know-how, culture and networks they currently have”.
The study focused on a division in a coal mining group, where five employees at management level resigned from January 2010 to July 2010.
No employer is sealed off from the competitive environment in industry. Soliciting and exploiting intangible resources will lead to competitive advantage.
Managers do not learn people management
Currently a vast majority of managers are scaling corporate ladders. This upward mobility is influenced by their technical astuteness in the area of their expertise. Few of these managers have enrolled with tertiary institutions to learn management.
Most managers who did not get exposure to management education prior to being promoted are not aware of intangible resources, they are only familiar with tangible resources.
A number of managers in small and large scale companies are not aware of what drives competitiveness in their operations. Some are of the opinion that the economies of scale and the brand new plants are the major drivers of competitive advantage.
Management are struggling to understand why two identical operations are experiencing performance variation. Some of the line managers, who did not go through formal management training, view competitive advantage in the light of production equipment, raw materials and formal reporting structures. Some managers believe that the industry that they choose determines the success of the company.
A coal mining annual report outlines principal risks and uncertainties the company faces, management of operations depends on a relatively small number of key employees. Loss of key employees, particularly to competitors, could cause a material diverse effect on the group.
As the employer develops and expands, the company believes that victory can only be scored on their ability to attract and retain highly skilled and qualified personnel, which are not guaranteed to stay, given the volatility of the skills market as well as the power of intellectual capital.
Hall (1992) argues that culture constitutes the beliefs, knowledge, attitudes of mind and customs to which individuals are exposed in an organisation, as a result of which they acquire a language, values, habits of behaviour and thought.
Culture defines and underpins the unique values and behaviours of firms, which in turn creates an environment where employees can excel to meet market challenges more effectively than competitors (Barney, 1986). According to Barney (1986), culture is a key driver of sustainable competitive advantage.
A challenge for management
Management is a skill that one has to master if one has to play “above the hoop”. Managers need to have relevant competencies in order to manage in this ever changing world. Rules of the management game are changing and managers find themselves ill prepared and increasingly frustrated in dealing with the changing rules of the game.
It is safe to say that managing in the old way is not working, yet the new way is difficult to comprehend and operationalise (Mathebula, 2011).
Daum (2005) advocates that many managers are still fully occupied with managing costs, managing sales pipeline, approving capital investments (solely based on financial plans) and with managing and motivating their people through (traditional) incentive schemes.
How to create and strengthen intangible assets in the enterprise’s operations and how to leverage intangible assets to boost business performance and create competitive advantage has not yet become part of common management practice, (Daum, 2005).
From the foregoing, it is apparent that among other issues the problem is rooted in the awareness of intangible resources. There is no plan to operationalise these resources when the managerial awareness is not in place. The point of departure for proper managerial awareness of intangible is to be able to identify, define, classify and delineate these resources.
Prahalad and Hamel (1990:82) argue that core competencies derive from collective learning of individual members within an organisation and their ability to work across organisational boundaries. Core competencies are a cluster of attributes that an organisation possesses which in turn allows it to achieve competitive advantage.
This is the competitive advantage that the company had accumulated and learned over time through the organisational processes and the art of deploying the right resources and capabilities. Hitt, et al. (2001) advocate that firms with insufficient financial capital may be unable to purchase facilities or hire the skilled workers required to manufacture products that yield customer value.
Sustainable Competitive Advantage criteria
According to Hitt, et al. (2001:115), sustainable competitive advantage is achieved when competitors have tried, without success, to duplicate the benefits of the firm’s strategy or when competitors lack the confidence to attempt imitation.
Amit and Schoemaker (1993) and Dierickx and Cool (1989) maintain that the Resource Based View theory posits that the resources that are intangible in nature, as opposed to tangible are a source of sustainable competitive advantage.
Resources and capabilities that are valuable, rare, costly to imitate, and non-sustitutable are core competencies and hence serve as a source of competitive advantage for the firm over its rivals (Hitt, et al., 2001 and Barney, 1991).
According to Amit and Schoemaker (1993:36) define strategic assets as the set of difficult to trade and imitate, scarce, appropriable and specialised resources and capabilities that bestow the firm’s competitive advantage. Strategic assets are resources that are simultaneously valuable, rare, difficult or costly to imitate, and non-substitutable.
Four criteria determine strategic capabilities and resources:
• Valuable resources or capabilities are those that create value for a firm by exploiting opportunities or neutralising threats in the firm’s external environment.
• Rare capabilities or resources are those possessed by few, if any, current or potential competitors.
• Costly-to-imitate Capabilities or resources are those that other firms cannot develop easily. Under unique historical conditions, some firms pick up skills, abilities and resources that yield economic rent.
• No substitutable capabilities or resources are those that do not have strategic equivalents.
The above table exhibits the competitive consequences, performance implications and SWOT category emanating from four resource based view competitive prescriptive. The table helps managers and employees to determine the strategic value of a firm’s resources.
Villalonga (2004:205) says a fundamental question in corporate strategy and industrial organisation is why profit differences exist across firms and industries. Porter’s (1980) answer to the question is based on the positioning paradigm of the industry which is the refined extension of classical scholars’ work of industrial organisation tradition.
Neoclassic theory posits that the performance optimisation generate economic rent based on the tangible resources that can yield low cost when economies of scale, learning curve, etc. The determinants of performance asymmetries in the structure-conduct-performance paradigm school are easy to copy, and draw their strength from industry power.
Connor (2002) cites the views of Amit and Schoemaker (1993) who opine that success comes to managers with a company perspective rather than view of strategy based upon industry perspective. Resource based view proponents agree in many ways on that industry-based approach to strategy fails to explain the heterogeneous range of firm strategies or firm specific idiosyncrasies and performance asymmetries.
The answer to Villalonga (2004)’s question is found in Connor’s (2002) view, who elucidates competitive advantage as follows: the asymmetries of performance between heterogeneous firms are very much driven by the intangible strategic assets.
Survey questions and responses
Do Managers understand the role played by intangible resources in the company? Responses show that 74.19% of participants agree that ‘managers understand the role played by intangible resources in their company’.
Managers in the higher echelon are much more sceptical; only 12.9% agree and only 6.45% strongly agree.
According to Meritum (2002), there are three ways to identify intangible resources: by definition, by classification or by the combination. Kaplan and Norton (2004:14) define intellectual capital as knowledge that exists in an organization to create differential advantage and capabilities of the company’s employees to satisfy customer needs.
From the definitional departure, Kaplan and Norton (2004) look at the role of intangible resources (knowledge) being to create differential advantage and satisfying the customer needs.
This idea underscored by Collis and Montgomery (1998:28) that says the intangible resources play an important role in the creation of competitive advantage because they are not being consumed in use.
Managers spend less time in recruiting the best employees. Furthermore, 12.90 percent of respondents reserved their opinion on this question while the remainder 12.91 percent disagree.
Sharkie (2003:20) advocates that organisations operate in all areas through people and it is their skills, experience, and knowledge (manifested as human capital) that, when effectively cultivated and leveraged, create sustainable competitive advantage.
It is imperative for the management to spend good time in recruiting the best candidate to fill the post because highly skilled, experienced, and knowledgeable candidate has ability to contribute to sustainable competitive of the organisation.
It is worrying to note that 74.91 percent of respondents indicated that management of the complex do not take recruitment of employees seriously. From this vantage point, sustainable competitive advantage is threatened and indicating a dull understanding of the role played by intangible resources.
Do you support the view that employees who resign from the company take their knowledge to the next employer? An overwhelming majority of 83.86 percent agree that employees who resign take their knowledge to the next employer. Insignificant number of respondents, 6.46 percent, disagrees and 9.68 percent reserve their opinion regarding the above question.
Intangible resources according to Hall (1993) could be classified into two groups namely; people dependent and people independent. People dependent is employees’ know-how, suppliers’ know-how, distributors’ know-how and servicers’ know-how, perception of quality standards, perception of customer service, ability to manage change, ability to innovate, team working ability, reputation and networks.
Hall (1993) advocates that intangible resources of know-how, culture, or networks which are people dependent can potentially ‘walk away’. When employees leave the company to join the competitors they take with them know-how, culture and networks they currently have.
The company that allows their key employees to leave without any attempt to retain them will suffer poor performance and short-lived competitive advantage. The respondents show that (83.86 percent) management are aware that when employees leave that company take with them their established relationship with all stakeholders.
How important is the retentions of employees’ skills and the utilisation of information gained from exit interview of employees?
Respondents are neutral regarding the company’s retention strategy of the employees. Most respondents disagree that the company utilises information gained in the exit interview.
Hall (1993) warns that intangible resources of know-how, culture, or networks which are people dependent can potentially ‘walk away’. When employees leave the company to join the competitors they take with them know-how, culture and networks they currently have.
Therefore in the organisation where retention of skills is not a priority the key employees are allowed to leave and management make no attempt to retain them.
According Grant (2001:123), economies of experience is just as individual skills are acquired through practice over time, so the skills of an organisation are developed and sustained only through experience.
The established firm had perfected its organisational routine over time hence it has competitive advantage over the newcomer. Grant (2001) means that retention of the employees has potential to generate economies of experience within the organisation.
The respondents show that the company’s retention of employees’ skills is weak and the opportunity to utilise the information gleaned in the exit interviews to strengthen the retention strategy of employees is not exploited accordingly. Retention of knowledge is linked with management’s understanding of the role of intangible resources and competitive advantage of the company.
Leadership and managerial qualities
What are the qualities of a good manager or the hallmarks of a competent leader? Perceptions of respondents about the quality of managers show different opinions about the quality of managers; respondents agree that the managers that they are reporting to or interacting with have qualities of being good managers.
Do you agree that knowledge plays a very important role towards company success in that it is not being consumed in use like equipment which depreciates? The overwhelming majority of respondents, 93.55 percent agree that knowledge plays a very important role in creation of company’s success because it is not being consumed in use.
According to Collis and Montgomery (1998:28), intangible resources play an important role in the creation of competitive advantage because they are not being consumed in use. An overwhelming majority of the respondents (93.55 percent) agree that knowledge play an important role in creation of competitive advantage. Therefore, there is no gap between theory and the practice as witnessed.
How important is the knowledge that the employees accumulate from the company and retain throughout their lives? Here 51.61 percent of respondents agree and 41.94 percent strongly agree, this can be summed up into 93.55 percent are agreement with the definition of human capital whilst the remainder 6.45 percent disagree; 93.55 percent of respondents know the definition of human capital.
A vast majority of respondents who constitute 93.55 percent of the sample support that human capital is all about knowledge of workers. There were only 3.23 percent of management in category 17 to 19 and 20 to 21 each, who do not know the human capital definition. Management demonstrated a good understanding of intangible resources.
Intangible resources questions
According to Edvinsson and Malone (1997), competitive advantage will be realised where there is mutual interaction between the taxonomy of three (human, structural and relational capital). Mutual engagement of the knowledge that the employees take with them when they leave the firm, the knowledge that stays within the firm at the end of the working day and the customers and the suppliers will give the firm sustainable competitive advantage.
From descriptive statistics vantage point, it can be recorded that the aggregate mean of competitive advantage questions 20 to 23 is 4.403 which underpins that overwhelming majority of the respondents agree or know how competitive advantage is achieved.
The median value of 4.25 strongly confirms that the response given is in agree and strongly agree regime. The mode is 4.75 which show that most respondents strongly agree. The perspective of respondents demonstrates that management understand the competitive advantage of the company.
Resources and capabilities that are valuable, rare, costly to imitate, and non-substitutable are core competencies and hence serve as a source of competitive advantage for the firm over its rivals (Hitt, et al., 2001 and Barney, 1991).
Nelson and Winter (1982) advocate that capabilities, routines and skills are hard to imitate, due to the fact that the underlying knowledge is hard, and sometimes impossible to codify. The resource that has competitive advantage must fulfil the resource based view prescription.
According to the analysis of the information from the questionnaire it can be said that the management understand the role plays by intangible resources in the company. The objectives of the study are therefore fulfilled and the research question is being addressed.
There is no gap between the theory and the understanding of management regarding intangible resources. The understanding of the intangible resources is not influenced by demographic characteristics of the sample.
Even though the managers know the importance of intangible resources, it is worrying to note that overwhelming majority have a perception that there is a poor drive focusing on soliciting the best knowledge worker in the industry. Competitive advantage of the firm will be short-lived when the employees leave the organisation to competitors.
Management are aware and understand that the employees who resign take their knowledge with them to the next employer.
The company is characterised as a revolving door since employee retention strategy is weak. The company does not invest more time in recruiting the best employees and again when the employees leave the company to join the competitors take with them their knowledge, skills, experience, networks and their established relations with some stakeholders.
It is of a serious concern to note that the employer failed to utilise the information gleaned and garnered from the exit interviews to strengthen its employee’s retention strategy.
Management have a good knowledge of tangible resources. This demonstrates that management are able to delineate the resources that are physical in nature and the role that they play in the organisation towards competitive advantage. It is essential to have a good knowledge of the tangible resources which will help to draw parallels with intangible resources.
The study shows that the management know that knowledge is a key component in creating sustainable competitive advantage of the company. The analysis and interpretation of the data collected through questionnaire shows that management are aware of intangible resources that lead to the enhancement of competitive advantage, the knowledge was tested through definitions and classifications of intangible resources. It can be concluded that there was no difference in articulating intangible resources at the different job level of management echelon.
Management understands that knowledge differs significantly with machine because it is not being consumed in use like machine that depreciate and suffer wear and tear. Investing in knowledge is more imperative because when the time is reaped the company will experience a favourable performance asymmetry against its competitors.
A number of the management concur with the view that the competitive advantage is achieved when the organisation controls the resources that are valuable, rare, costly to imitate and non-substitutable. The responses to the questions show that the management understand competitive advantage is achieved through intangible resources. The study shows that people skills, experience, and knowledge when effectively cultivated and leveraged, could lead to competitive advantage.
Managers understand the role of intangible resources that lead to the enhancement of competitive advantage. It is noted that the company’s retention strategy of key employees is weak and the process of recruiting knowledge and skilled worker is underutilised. This manifests that even though in the short run might seem to be experiencing competitive advantage, but in long run it will lose its competitive streak unless the retention strategy and succession planning are developed, implemented and operationalise.
It is highly recommended to develop a retention strategy for its employees. The organisation is being reduced into revolving door – employees are coming and going. The organisation should invest more time in searching for the best candidate for the job in the industry.
The organisation should conduct a survey to get to understand the concerns of the employees and then address them in the retention strategy. The organisation should develop succession planning to ensure that it does not bleed off the higher flyers to the competitors.
It is further recommended that the organisation should develop an exit interview system that will be used to garner information from every employee who decides to leave the organisation. The system should utilise the information to review the retention strategy of the knowledge worker.
The intangible resources are more likely than tangible resources to a competitive advantage.
First, organisations must ensure that when formulating policy, proper communication channels are set up. Even importantly, involvement of management is crucial as the implementation policy will affect them in their everyday working life. It is imperative that the formulation and implementation of policies become the priority of all employees in managerial positions.
Even in big organisations of 2000 or more, this is possible by encouraging different small business units and divisions as well as departments, to forward their collective contributions towards such a policy. Then a task team can work on the contributions, group them according to similar comments and then come up with one policy that will be a product of all management staff. All those involved will have to adhere to set guidelines and timeframes.
There must be proper mechanisms set up whereby the process of managing intangible assets can be closely monitored. These mechanisms must be quality oriented, so that managers will hire individuals for the sake of hiring them to avoid having incentives cut. This will ensure that the ‘right’ individuals are hired for the ‘right’ jobs.
Management must show commitment to addressing intangible resources in their respective departments. The perception held by number of managers that the company “is doing nothing about intangible resources” is not good for an organisation that is striving for world class competiveness. To achieve world standards, commitment must become part of the organisation’s culture.
• The report is based on full and referenced research for an MBA dissertation at Milpark Business School, 2011.
PHOTO; Ace Shikweni (BTech extraction metallurgy, MBA) is a mining plant and process superintendent and project manager.