Factors such as globalization that leads to new technology, free flow of capital, increased competition, demand for innovation, changes in customer demand, changes in economic, and political structures are constantly reshaping the way business is carried out (Buckley and Carter, 2000; Thorne and Smith, 2001). Previous research has acknowledged the fact that organizations have begun to realize that sustainable advantage relies on managing intangible resources such as the knowledge embedded assets. According to Stewart (2002), in the 21st century, knowledge embedded assets have become more important to the organizations than financial and physical assets. Therefore, in order to compete in this millennium, organizations must have the ability to create value, be agile and sensitive to the market.
Knowledge embedded assets like ideas, practices, talents, skills, know-how, know-what, relationships and innovations, that arise from the creation of IC, have become a pre-eminent economic resource and the basis for competitive advantage (Stewart, 2002; Finney, Campbell and Powell, 2004; Demediuk, 2002; Graves, 2002). According to Sveiby (1997), knowledge embedded assets can be found in three areas: the competencies of the employees; organization’s internal structure such as patents, models, computer and administrative systems; and organization’s external structure such as brands, reputations, relationship with customers and suppliers. Stewart (2002), on the other hand, suggests that knowledge embedded assets comprise of talents, skills, know-how, know-what, relationships and also include machines and network that can be used to create wealth to an organization. In short, many IC theorists termed the knowledge embedded assets as IC (e.g., Demediuk, 2002; Sullivan, 1999; Stewart, 1997).
There is a multi-faceted description of IC as proposed by IC theorists. According to Stewart (2002), the term ‘IC’ seemed to have first appeared in 1958 when two financial analysts reported that the IC of several small science-based companies is perhaps the most important element in the organizations’ financial statements. The analysts termed the high stock valuations as an intellectual premium (Stewart, 2002), and, for a quarter of century, this idea remains unchallenged. In the 1980s, however, discussion and debate on resource-based theory had nurtured the ideas of IC. A study by Sveiby (1987), for example, proposed that knowledge-based assets could be found in three places; the competencies of organization members, its internal structure such as patents, models, computer and administrative assets, and its external structure such as brands, reputation, relationships with customers (Sveiby, 1997). Meanwhile, Edvisson (1997) a leading thinker in IC from Skandia Insurance classifies IC into three dimensions: human capital (including employees’ collective competence, capabilities and brain power), organizational capital (such as a firm’s policy and procedures, customized software applications, research and development programs, training courses, patent and the like), and customer capital (comprising of relationship with customers, suppliers, industry associations and market channel).
Most of the definitions and frameworks of IC includes human, customers, suppliers, and organizations as factors of IC (e.g. Roos and Roos, 1997; Saint-Onge, 1996). In order to remain forefront and maintain competitive edge, organizations must have the capability to retain, develop, organize and utilize their IC (Kalling, 2002; Wiig, 2000). They must also be able to consolidate their IC faster than their competitors. Literature has argued that the value of an organization is largely based on the management and utilization of IC (Ukkola et al., 1999; Chris and Emma, 1999; Beveran, 2002). Thus, IC must be explicitly manage so that the competitive advantage will emerge from the way a specific knowledge is applied to production factors (Aranda and Molina-Feraz, 2002). Thus, to explicitly manage the IC, an understanding of how knowledge is formed and how people and organizations learn to use knowledge is essential.
There are two levels of knowledge within IC: explicit knowledge and tacit knowledge (Hall and Adriani, 2002; Kamiki and Mphahlele, 2002). Explicit knowledge is articulated knowledge and it can be embodied in the form of documents, standard operating procedures, and blueprints. Tacit knowledge, on the other hands, includes the intuition, perspectives, beliefs, and values that people form as the result of their interactions and experiences (Hall and Adriani, 2002; Kamiki and Mphahlele, 2002). In an organization, tacit knowledge is made up of the collective mindsets of everyone in the organization. This includes the way how a leader of an organization perceives his industry and his organization. Tacit knowledge also determines how an organization makes decisions and shapes the collective behavior of its members (Saint-Onge, 1996). Haldin-Herrgard (2000) suggests that tacit and explicit knowledge should be managed differently. Much of existing literature discusses more on philosophy and concepts of IC and less attention has been given on the value creation aspect of IC. To sum up, IC theorists argue that IC can only generate value when it is accessible and utilized. IC management is applied to access and utilize IC for an organization.