THE INFLUENCE OF INTELLECTUAL CAPITAL ON THE PERFORMANCE OF TELEKOM MALAYSIA MAZLAN BIN ISMAIL, UNIVERSITI TEKNOLOGI MALAYSIA,SZ 19:16 (Pind. 1/97) UNIVERSITI TEKNOLOGI MALAYSIA, BORANG PENGESAHAN STATUS TESIS Juul: Tie [weieeneg oF IvTectecrum, CaciTau Ow Tie Perronmance Of Terenom Macaysia StSIPENGAUAN: D, 2004/2005 Saye Maztan Biv /smrau (HURUF ESAT) smengaku membenarkan tesis @SMASaslanwDoktor Foleafsh)* ini dsimpan di: Perpustakaan Universit Teknologi Malaysia dengan syaral-syeratkegunaan seperti benkut 1. Tesis adalah kok Universit Teknolog Malaysia, 2 Perpustakaan Universiti Teknologi Msliysia dlbearkan membuat slinan untuk tujuan pengujan sah 3. Perpustakaan dibenarian membuat salinan tesis ini sebagai bihan perukaran anare inaitasi pengajan ting 4 Sil mndskan (4) (Mengandungi maklumat yang berdatjeh Keslamaten atau ao -epentngan Malaysin sper yang vermaktu di dalam AKTA RAHSIA RASMI 1972) (Mengundungi maklumat TERHAD yang telah dtentukan REREAD oleh orgnsesiadan di mana penyelidikan dil) ‘TIDAK TERHAD Disahkan oleh She [TANDATANGAN PENYELIA) (tno FENULI Alamat Tetap: , 54. Ta PERMATANG Genta 3200 Karas Ph Dr Anal Rbooe Sp S. Pera. F. Pinene . Nama Penyetia Tort; _ 1512 2005 ‘Tik IS bee omy CATATAN: + Potong yang tsk berkenam, ** Tika ‘tess ini SULIT nau TERHAD, sl lampitan st davipada pak ‘eiussorgiss eenai dengan menyatkan skal seh de emph en po sbeasan saga SULIT aia TERUIAD. Tes dimuon sebagat tsi bagi zsh Dokor Falsfth dan Sujana sec penyldicn, stu dean bagi pengilan seca kegs Auons dan pexyellian, aia {Laporan Proje jana Ns (PS.Librarian October 2005 Perpustakaan Sultanah Zanariah UTM, Skudat Jol Si, CLASSIFICATION OF THESIS AS RESTRICTED ~ TE INFLUENCE OF INTELLECTUAL CAPITAL ON THE PERFORMANCE OF TELEKOM MALAYSIA BY MAZLAN BIN ISMAIL Please be informed that the above-mentioned thesis entitled * TTIL INFLUENCE OF INTELLECTUAT. CAPITAL ON ‘THE PERFORMANCE OF TELEKOM MALAYSIA” be classified as RESTRICTED for a period of thrce (3} years from the ‘ate of this loter. The reasons for this classification are (The thesis contains a confidential Telekom Malaysia's documents Gi) ‘The thesis contains confidential information about Telekom Malaysia from the interviewees and survey respondents, ii) The thesis contains strategic recommendations to Telekom Malaysia, hank you, Sincetely yours, Sh DR. AIIMAD RATMAN BIN SONGIP, BUSINESS & ADVANCED TECRNOLOGY CENTRE UNIVERSITI TEKNOLOGI MALAYSIA, $4100 KUALA LUMPUR, ‘TEL :03-20914020‘We hereby declare that we have read this thesis and in our opinion this thesis is sufficient in teems of scope and quality for the award of the degree of Doctor of Engi Nanect Supaniiort +P De, Ment Rebiman Sorpy Date 'S Dee 2s ing (Engineering Business Management)” sigosue Pe Name of Supervisorll ; ..A8® MALIA Bin ABD Ral Ak Date 15.12. 2005 Slum Name of Supervisor Itt: .[R8NPR: Now grou Baicor Date 112+ oes1 decre that this thesis entiled “ The influence of Intellectual Capital on the peformance of Telekom Malysia" is result of my own research excepts as cited in the references. The thesis has not been accepted for any degree and i not concurently submited as a candidate of anyother degreeBAHAGIAN A — Pengesahan Kerjasama Adalah disahkan babawa projek penyelidikan tesis in telah dilaksanaken melalui kerjasama antara dengan, Disabkan oleh: Tandatangan 2 sesssscsssssceeeseeeeeseeseerseenereees —Tatikht..cccse Nama Jawatan (Cop rasmi) BAHAGIAN B - Untuk Kegunaan Pejabat Sekolah Pengajian Siswazah ‘Tesis ini telah diperiksa dan diakui ole Nama dan Alamat Pemeriksa Luar Nama dan Alamat Pemeriksa Dalam Nama Penyelia Lain Disabkan oleh Penolong Pendaftar di SPS: Tandatangan Tarikh: NamaTHE INFLUENCE OF INTELLECTUAL CAPITAL ON THE PERFORMANCE OF TELEKOM MALAYSIA MAZLAN BIN ISMAIL A dissertation submitted in partial fulfilment of the requirements for the award of the degree of Doctor of Engineering (Engineering Business Management) Business & Advanced Technology Centre Universiti Teknologi Malaysia OCTOBER 2005ii I declare that this thesis entitled “ The influence of Intellectual Capital on the performance of Telekom Malaysia” is a result of my own research excepts as cited in the references. The thesis has not been accepted for any degree and is not concurrently submitted as a candidate of any other degree. Signature Name DateDedication To my beloved mother, father and wife for their prayers, patience, support and encouragement and to my seven children — ‘InsyaAllah’(with Allah’s help), if you believe enough, a man can do anything. iliiv ACKNOWLEDGEMENT. I would like to thank and express my gratitude to my supervisors - Prof. Dr. Nooh Abu Bakar, Prof. Madya Dr. Ahmad Rahman Songip, En. Abd. Halim Abd Razak, and my dearest adviser En. Raduwan Safperwan for giving their valuable guidance, advice and motivation, a long the way, for me to accomplish the task. Thank you to Prof. Dr. Hamdani Saidi, the academic team members and the supporting staff at Business & Advanced Technology Centre for giving their support and assistance during my study at BATC My special thanks to Telekom Malaysia especially YBhg Dato Dr. Abd Rahim HjDaud and Dato Syed Mustaffa Syed Ali who have decided to provide scholarship and study leave for me to pursue this study. To General Manager of Human Resource Development and the Yayasan Telekom team members, Puan Sharifah, Puan Rohana and En. Shaharudin for their continuous support and cooperation during my study leave period, other Telekom Malaysia management team and executives for providing confidential information, sincere valuable thought and support. This study would not have been possible without their assistance. To my mother, Tok Puan for her continuous prayer and encouragement, to my wife Fadhilah Abdullah and my children Muslihuddeen Rabbani, Ahmad Uzair, Abbasi Madani, Faatibah, Najmuddeen Erbakan, Putri Naajihah and our new born 7* child, Ahmad Yassin Rantissi for their prayers, patience and sacrifices. Last but not least to my brother, En. Mohd Fahmi, my uncle En, Wanchee Jusoh and family, Ustaz Hassan Abdul Razak and my close friends for their motivation, assistance and updates especially during my busy and tired times. All of the abovementioned individuals and many others have presented an additional component of intellectual capital - the spiritual capital - to me. I have started to slowly understand it, develop it, think more about it, and research about it. I have become that much better and richer, intellectually and spiritually. Alhamdullillah (Thanks to Allah). My sincerest and heartfelt thanks to all of you good people.ABSTRACT This case study investigates the influence of intellectual capital on the performance of Telekom Malaysia. It consists of investigating the level of intellectual capital, the effect and influence of spiritual capital, the importance of knowledge management and managing and leveraging of intellectual capital on the performance. A mixed method research approach is used with strategies of inquiry that involve sequential quantitative and qualitative data collection. With broad intellectual capital theoretical perspective guides including the spiritual capital, the data collection is done sequentially in phases beginning with a questionnaires survey, followed by secondary data analysis and finally the interview sessions. Independent variables are human capital, structural capital, relational capital, spiritual capital, knowledge management and managing and leveraging of intellectual capital and dependent variable is performance improvement in the aspect of organisational and business leadership, operating efficiency and business performances. The survey involves the executives to assistant general manager levels working at various departments at the 14 states business areas and headquarters level and the interviewees are from the general manager to senior vice-president and CEO. Statistical techniques such as means of variance, factor analysis, ANOVA test, regression analysis, path analysis and narrative passages are used in analysing the data, The study indicates a positive significant relationship between relational, human, spiritual and structural capital and maneging and leveraging of intellectual capital on the performance whereas knowledge management has indirect relationship to the performance. This research makes important theoretical and empirical contributions to the literature on the influence of intellectual capital, on the effect and influence of spiritual capital and the importance of managing and leveraging of intellectual capital on the performance of the organisation. By having a stronger spiritual capital within the higher management to manage and leverage the present intellectual capital, Telekom Malaysia will achieve further performance improvement in the future.vi ABSTRAK Kajian kes ini melibatkan pemeriksaan terhadap pengaruh modal intelek ke atas prestasi Telekom Malaysia. Ianya meliputi pemeriksaan terhadap tahap modal intelek, kesan dan pengaruh modal kerohanian, kepentingan pengurusan ilmu dan pengurusan serta daya percungkilan modal intelek terhadap prestasi. Pendekatan kaedah bercampur digunakan didalam kajian ini dengan strategi penyiasatan melibatkan pengumpulan mallumat secara kuantitatif yang kemudiannya dituruti pula dengan secara kualitatif. Dengan berpandukan kepada teori modal intelek termasuk modal kerohanian, fasa pengumpulan data bermula dengan penggunaan borang kajiselidik dituruti dengan ‘maklumat sekunder dalaman syarikat dan diakhiri dengan sesi temubual. Pembolehubah, tidak bersandar terdiri dari modal insan, modal kestrukturan, modal perhubungan, modal kerohanian, pengurusan ilm dan pengurusan serta daya percungkilan modal intelek, manakala pembolehubah bersandar ialah peningkatan prestasi yang terdici dari Kepimpinan perniagaan dan organisasi juga kecekapan operasi serta prestasi perniagaan. Borang kajiselidik melibatkan anggota diperingkat eksekutif sehingga peringkat penolong pengurus besar dati 14 pejabat perniagaan negeri dan diperingkat ibupejabat, manakala sesi temubual melibatkan anggota di peringkat pengurus besar, naib presiden Kanan serta ketua pegawai eksekutif Telekom Malaysia. Teknik statistik seperti Analisa Min, Analisa Perbandingan Min, Analisis Faktor, Analisis Varian, Analisis Regresi, Analisis Lorongan sera analisa perjalanan penceritaan di gunakan didalam proses analisa maklumat. Kajian menunjukkan hubungan positif yang signifikan antara modal perhubungan, Kerohanian, insan dan modal Kestrukturan juga pengurusan dan daya pencungkilan modal intelek terhadap prestasi, manakela pengurusan ilmu mempunyai hubungan yang tidak langsung dengan prestasi. Kajian ini telah_memberikan sumbangan teori dan empirikal terhadap keilmuan disegi pengaruh modal intelek, kesan dan pengaruh modal kerohanian dan kepentingan pengurusaa serta daya pencungkilan modal intelek terhadap prestasi organisasi. Dengan mempunyai modal kerohanian yang Jebih kuat dikalangan pengurusen atasan untuk mengurus serta daya mencungkil modal intelek yang sedia ada, Telekom Malaysia akan dapat mencapai tahap peningkatan prestasi yang lebih baik dimasa depan,TABLE OF CONTENTS CHAPTER TITLE Declaration of the Status of Thesis Letter regarding status classification of thesis ‘Supervisor's declaration Declaration on cooperation Title page Declaration of originality and exclusiveness Dedication Acknowledgements Abstract (English) Abstrak (Bahasa Melayu) Table of Contents List of Tables List of Figures List of Symbols/Abbreviation/Notation/ Terminology List of Appendices INTRODUCTION 1.1 Background 1.2 Research Problem 13 Research Objectives 1.4 Justification for Study 1.5 Organization of Thesis 16 Key Definitions and Concepts Summary PAGE ii iii iv y vi vil xii xxi xxii zoom vilLITERATURE REVIEW Introduction Intellectual Capital and Business Performance Definition and Classification of Intellectual Capital The Need for a Redefinition of Intellectual Capital aR Deficiency of Contemporary Definition of Intellectual Capital 6 Spiritual Capital in Practice 2.7 Knowledge Management and Intellectual Capital Summary THE DEVELOPMENT OF A NEW MODEL OF INTELLECTUAL CAPITAL BY INCLUDING SPIRITUAL CAPITAL 3.1 Metaphor of Spiritual Capital 3.2 What is Spiritual Capital 3.2.1 Spiritual and Intelligence 3.2.2. Spiritual, Culture and Religion 3.2.3. Spiritual and Servant-Leadership Concept. 3.2.4 Spiritual and the New Sciences Theory 3.3. Organization’s Intellectual Capital Central-Triangle Model 3.4 The Potential Relation of Spiritual Capital to Other Forms of Capital 3.5. Ten Clues to the Presence of Spiritual Capital Within Individual or Organization Analysis and Comments ‘New Definition of Intellectual Capital Summary RESEARCH DESIGN AND METHODOLOGY 4.1 Research Framework 4.2 Research Model 65 65 o7 viii43° Questionnaire 4.3.1 Questionnaire Pilot-test 43.2 Sample 433 Data Collection 44° Secondary Data 4.5 Interview Summary DATA ANALYSIS AND DISCUSSION 5.1 Questionnaire Survey Data 1 Reliability of Measures Respondent's Characteristic Accounting for Bias. Descriptive Statistic of Variables aR Survey Results 5.1.5.1 Human Capital 5.1.5.2 Structural Capital 5.1.5.3. Relational Capital 1.54. Spiritual Capital 5.1.5.5 Knowledge Management 5.1.5.6 Managing and Leveraging of Intellectual Capital 5.7. Performance Improvement 5.8 Factor Analysis for Intellectual Capital 5.9 Factor Analysis for Knowledge ‘Management 5.1.5.10 Factor Analysis for Managing and Leveraging of Intellectual Capital 5.1.5.1 Factor Analysis for Performance Improvement $.1,5.12 Test Analysis a 79 80 81 82 86 88 90 90 a OL 94 96 96 98 100 101 106 14 uy 119 ix$.1,5.13 One Way ANOVA Test for Independent Variables Against Age 119 3.14 One Way ANOVA Test for Independent Variables Against Qualification 121 One Way ANOVA Test for Independent Variables Against Job-grades 132 One Way ANOVA Test for Independent Variables Against Department 137 5.1.5.17 One way ANOVA Test for Independent Variables Against Place of Work 142 5.1.5.18 One way ANOVA Test for Independent Variables Against Length of Service 151 5.15.19 Summary of Tests 158 5.1.5.20 Relationship Amongst Variables 163 5.15.21 Regression Analysis 165 5.1.5.2 Path Analysis 176 5.2 Secondary Data 180 5.3 Interview 183 5.3.1 Interview Data 183 3.4 Analysis and Discussion 187 5.4.1 Intellectual Capital 187 3.4.1.1 Human Capital 188 5.4.1.2 Structural Capital 195 5.4.1.3 Relational Capital 198 3.4.1.4. Spiritual Capital 201 5.4.2 Knowledge Management 209 5.4.3 Managing and Leveraging of Intellectual Capital 2143.4.4 Causal Relationship 5.4.4.1 The Effect of Spiritual Capital Relational Capital and Managing and Leveraging of Intellectual Capital 3.4.4.3 Knowledge Management 5.4.5 Overall Findit Summary 6 RECOMMENDATION AND CONCLUSION, 6.1 Benefits to Telekom Malaysia 6.2. Conclusion 6.3 Limitation of the Study 64 — Recommendation 6.4.1 Spiritual Capital Enhancement 642 Theoretical and Deployment Framework 6.4.3 Consequence Management System 644. Employees Test Profiles 64.5. Long-term Structured Training 64.6 Knowledge Management REFERENCES 4.2 Human Capital, Structural Capital, BR 242 xiTABLE NO. 43 4A 45a 4.5b 4.6 47a 4.76 48a 4.8b 5 5.2a 5.2 53 34 55 LIST OF TABLES TITLE Definitions of intellectual capital Top 20 ‘Global Most Admired Knowledge Enterprise” yearly report Top 20 ‘Global Most Admired Knowledge Enterprise” yearly report (continue) Features and characteristic of recovery or rebound Human capital Structural capital Relational capital Spiritual capital Knowledge management Knowledge management (continue) Managing and leveraging of intellectual capital Performance improvement Performance improvement (continue) Evaluation check-list for secondary data Evaluation checklist secondary data (continue) Cronbach's Alpha Coefficient of instrument for pilot and actual studies Demographic data of the respondents Demographic data of the respondents (continue) Non-responded questionnaires Descriptive statistic: Central tendencies The mean and percentage of respondents on human capital ‘The mean and percentage of respondents on structural capital PAGE 18 97 9837 38 39a 5.9 5.10 3.12 3.12d 5.lde The mean and percentage of respondents on relational capital ‘The mean and percentage of respondents on spiritual capital ‘The mean and percentage of respondents on knowledge management ‘The mean and percentage of respondents on knowledge management (continne) ‘The mean and percentage of respondents on managing and leveraging of intellectual capital ‘The mean and percentage of respondents on ‘TM’s performance improvement Factor Analysis of Intellectual capital (human capital, structural capital, relational capital and spiritual capital) Factor Analysis of Intellectual capital (human capital, structural capital, relational capital and spiritual capital) (continue) Factor Analysis of Intellectual capital (human capital, structural capital, relational capital and spiritual capital) (continue) Factor Analysis of Intellectual capital (human capital, structural capital, relational capital and spisitual capital) (continue) Factor Analysis of Intellectual capital (human capital, structural capital, relational capital and spisitual capital) (continue) New scales of intellectual capital variables Factor analysis for knowledge management. Factor analysis for knowledge management (continue) New scales for knowledge management variables Factor analysis for managing and leveraging of intellectual capital. Factor analysis for managing and leveraging of intellectual capital (continue) 99 101 105 106 108 109 110 lll 116 17 sili3.17 5.18 5.19) 5.20 3.21 5.22a 5.22b 5.24a 5.24b 5.26a 5.26b 5.284 5.28b ‘New scales for managing and leveraging of intellectual capital variables. Factor analysis for performance improvement New scale for performance improvement ‘T-Test result for independent variables against gender One Way ANOVA test result for independent and dependent variables against age One Way ANOVA test result for human capital against qualification One Way ANOVA test result for human capital against qualification (continue) One Way ANOVA test result for structural capital against qualification ‘One Way ANOVA test result for relational capital against qualification One Way ANOVA test result for relational capital against qualification (continue) ‘One Way ANOVA test result for spiritual capital against qualification ‘One Way ANOVA test result for knowledge management against qualification One Way ANOVA test result for knowledge management against qualification (continue) One Way ANOVA test result for managing and leveraging of intellectual capital against qualification. ‘One Way ANOVA test result for performance improvement against qualification. One Way ANOVA test result for performance improvement against qualification (continue) ‘One Way ANOVA test for human capital against job-grades One Way ANOVA test for structural capital against job-grades One Way ANOVA test for relational capital against job-grades M7 1s 1s 19 120 124 126 131 132 xiv5.36 5.38 5.38b 3.39 3.400 5.40b 5.40 5.40d SAla S.4lb 5.42a One Way ANOVA test for spiritual capital against job-grades One Way ANOVA test for knowledge management against job- grades One Way ANOVA test for managing and leveraging of intellectual capital against job-grades ‘One Way ANOVA test for performance improvement against job- grades One Way ANOVA test for relational capital, spiritual capital knowledge management, managing and leveraging of intellectual capital and performance against department One Way ANOVA test for the human capital against department ‘One Way ANOVA test for structural capital against department One Way ANOVA test for structural capital against department (continue) One Way ANOVA test for human capital, relational capital, managing and leveraging of intellectual capital and performance improvement against place of work ‘One Way ANOVA test for structural capital against place of works One Way ANOVA test for structural capital against place of work (continue) ‘One Way ANOVA test for structural capital against place of work (continue) One Way ANOVA test for structural capital against place of work (continue) ‘One Way ANOVA test for spiritual capital against place of works One Way ANOVA test for spiritual capital against place of works (continue) One Way ANOVA test for knowledge management against place of works 137 138 139 140 141 142 143 144 146 147 148 149 xv5.46a 5.46b 5.470 5.47 5.48 S.48b 5.48 5.49 5.50 One Way ANOVA test for knowledge management against place of works (continue) One Way ANOVA test for human capital, relational capital and managing and leveraging of intellectual capital against length of service ‘One Way ANOVA test for structural capital against length of service ‘One way ANOVA test for structural capital against length of service (continue) One Way ANOVA test for spiritual capital against length of service ‘One Way ANOVA test for knowledge management against length of service. One Way ANOVA test for knowledge management against length of service (continue) ‘One Way ANOVA test for performance against length of service One Way ANOVA test for performance against length of service (continue) Summary of the variables tests against demographic items Summary of the variable tests against demographic items (continue) Summary of the variable tests against demographic items (continue) Pearson Correlation between variables Regression analysis for human capital, structural capital, relational capital to spiritual capital Regression analysis for structural capital and relational capital to human capital Regression analysis for relational capital to structural capital Regression analysis for knowledge management and managing and leveraging of intellectual capital to human capital 154 161 166 166 166 167 167 xvi3.54 5.56 5.59 5.60 5.61 Regression analysis for knowledge management and managing and leveraging of intellectual capital to structural capital Regression analysis for knowledge management and managing and leveraging of intellectual capital to relational capital Regression analysis for knowledge management and managing and leveraging of intellectual capital to spiritual capital Regression analysis for knowledge management to managing and leveraging of intellectual capital Regression analysis for human capital, structural capital, relational capital and spiritual capital to performance Regression analysis for human capital, structural, capital, relational capital and spiritual capital to performance — operating efficiency and business, performances (profit, market share, revenue, CSI, products/services launch) Regression analysis for human capital, structural capital, relational capital and spiritual capital to performance ~ organisational leadership and business leadership Regression analysis for human capital, structural capital, relational capital, spizitual capital, knowledge management, management and leveraging of intellectual capital to performance Regression analysis for human capital, structural capital, relational capital, spiritual capital, knowledge management, managing and leveraging of intellectual capital to performance — operating efficiency and business performances 168 168 169 169 170 171 173 174 xvii5.63 3.64 5.650 5.65b 5.66 5.67a 5.67b 567¢ Regression analysis for human capital, structural, capital, relational capital, spiritual capital, knowledge management, management and leveraging of intellectual capital to performance ~ organisational leadership and business leadership List of secondary data Salient features of secondary data Salient features of secondary data (continue) List of interviewees Salient features of comments from interviewees that are directly related to subjects being studied Salient features of comments from interviewees that are directly related to subjects being studied (continue) Salient features of comments from interviewees that are directly related to subjects being studied (continue) 175 180 181 182 183 184 185 136 xviiiFIGURE NO. 34 5.6 LIST OF FIGURES TITLE PAGE ‘Metaphor of intellectual capital 23 The proposed “Intellectual Capital Central-Triangle” model 53 Knowledge claims, strategies of inquiry and methods leading to approaches and the design process 65 Research model 67 Path analysis of HC, SC, RC and SpC 176 Path analysis of HC, SC, RC, SpC and Performance(P) 176 Path analysis of HC, SC, RC, SpC and Performance ~ Operating Efficiency and Business Performances (OEBP) 177 Path analysis of HC, SC, RC, SpC and Performance ~ Organisational Leadership and Business Leadership (OBL) 177 Path analysis of HC, SC, RC, SpC, KM, MLIC and Performance ~ Operating Efficiency and Business Performances (OEBP) 178 Path analysis of HC, SC, RC, SpC, KM, MLIC and Performance ~ Organisational Leadership and Business Leadership (OBL) 178 Path analysis of HC, SC, RC, SpC, KM, MLIC and Performance (P) 179 Overall Path analysis amongst HC, SC, RC, SpC. MLIC, KM and Performance (P) 179 xixLIST OF SYMBOLS/ABBREVIATIO! AGM. CEO C&B cKO cMo cNo cts Dev. ELDP GM HC HQ HR HRD HRM HSC Ic 1S12020 xx \S/NOTATION/TERMINOLOGY Assistant General Manager Chief Executive Officer Consumer Business Sales Chief Knowledge Officer ‘Change Management Office Customer Network Operation Corporate Strategy Development Executive and Leadership Development Program General Manager Human Capital Headquarters Human Resource Human Resource Development Human Resource Management Higher School Certificate Intellectual Capital Generic standards based on universal ethic, moral Values and on the tenets of Islam Knowledge Management Key Performance Indicator ‘Managing and Assessing Performance System Major Business Sales Managing and Leveraging of Intellectual Capital Multimedia Super Corridor Malaysian Telecommunication Instructions Malaysian Certificate of Education Management Committee Meeting Management Leadership Development ProgramPGs Potentia M QUBE RC sc sD SGM SMAC SMDP SNO SPM Spc SVP T™. TMBEA TSY TIC vss xxi ‘Manual Prosedur Perniagaan The National Information Technology Agenda Network Operation Network Development Operating Efficiency and Business Performance Organisational Leadership and Business Performance Performance State of Penang Potential for Manager Quality Improvement and Business Excellence Relational Capital Structural Capital Standard Deviation Senior General Manager Senior Management Assessment Centre Senior Management Development Program State Network Operation Sijil Tinggi Pelajaran Spiritual Capital Sijil Tinggi Persekolshan Senior Vice-President Telekom Malaysia Telekom Malaysia Business Excellence Assessment Telco Strategy Telecom Training College Vice-President Voluntary Separating Scheme.xxii LIST OF APPENDICES APPENDIX TITLE PAGE A Cover Letter from Scholarship Division 256 B Questionnaire Survey 257 c Structured Interview QuestionsCHAPTER 1 INTRODUCTION 1.1 Background The telecommunication industry has entered a very competitive environment for the past few decades and the industry has been deregulated. The Malaysian goverament has established a vision to be a developed nation by year 2020 and the deregulation of telecommunication services is one of the most important steps towards achieving that vision. The era when the Government, first through it’s Jabatan Telekom Malaysia, and then through Telekom Malaysia Berhad, held the monopoly over the telecommunication services effectively ended by 1992. Presently, there are four telecommunication services operators to serve the 25.58 million Malaysian populations as at December 2004 (Department of Statistic, Malaysia, 2004). At that same time, there were 4,60 million fixed telephone services, 11.43 million mobile services and 2.89 million dial-up internet customers (Malaysian Communication & Multimedia Commission, 2004). To achieve the aspiration and realise the ision of making Malaysia a developed nation, and to survive in this highly competitive and challenging business environment, Telekom Malaysia has to be competitive, dynamic and robust. With the advancement made in the telecommunication technology, with the formation of various forms of business coalitions between local telecommunication services operators and other world-class telecommunication companies, the challenge for the business survival of Telekom Malaysia is inevitable. Thus Telekom Malaysia that holds 97% of the market share of the fixed telecommunication services, 39% of the mobile services and 54% of the internet customers in Malaysia customers (Malaysian Communication & Multimedia Commission, 2 104) has to maximize the utilisation of Telekom Malaysia’sresources, especially it’s intellectual capital. Intellectual capital is defined as an identifiable non-monetary asset without physical existence held for use in the production or supply of products or services, for rental to others or for administrative purposes (IAS 38, 1998). As an established leader of the nation’s telecommunication services industry, Telekom Malaysia's intellectual capital has grown, because it has been developed and nurtured for the past few decades. In his keynotes address during Global Knowledge II Conference 2000, Dr. Mahathir Mohamad (2000), former Prime Minister of Malaysia says: “Vision 2020 emphasizes that in the information age which we have entered — our society must be information rich. There was a time when land was the most fundamental basis for prosperity and wealth, then came the second wave, the age of industrialisation. Now, increasingly knowledge will not only be the basis of power but also prosperity...Through the shift to k-economy, where the knowledge content and the knowledge contribution will see a quantum leap in every area, the Malaysian economy and Malaysia’s society will not be quite the same again” Malaysia’s development vision, as outlined in Vision 2020, is to become a fully developed nation with a “values-based society”. The National IT Agenda (NITA) interprets this, as the roles of information, knowledge and techno-preneurship are important to leapfrog the developmental stage from industrial economy to the K- economy. NITA’s mission is “...knowledge must be translated into value and wealth- creation for the property of Malaysians” (Wan Mohamad, 1999), President and CEO of MIMOS Berhad Malaysia says: “Malaysia needs to leverage on knowledge economy, where intellectual capital becomes a primary factor of growth. Because of this, the high density of the repositories of this intellectual capital, knowledge workers become vital to every country’s success” (Shariffadeen, 2000). Blair (2000) of Brooking Institute suggests that tangible assets have continued to tumble in value’ “If you just look at the physical assets of the companies, the things that you can measure with ordinary accounting techniques, these things now account for less than one fourth of the value of the corporate sectors.Another way of putting this is that something like 75 percent of the sources of value inside corporations is not being measured or reported on their books”, In yet another demonstration of the importance of intangible assets, the Sloan School of Management at MIT and the consulting firm Arthur Anderson recently announced the joint formation of the New Economy Value Research Lab ~ the think tank study — and develops quantitative valuations of the intangible assets Wall Streets finds increasingly important in the new economy. Lab co-chair, Boulton (2000) says: “Even the Coca-Colas and Disney's of the world are actually creating most of their value from assets that don’t appear on their Balance Sheets”. The new knowledge economy places a high premium on human capital. Davenport (1999) cogently describes this new paradigm as, “People posses innate abilities, behaviours, personal energy and time. These elements make up human capital the currency people bring to invest in their jobs. Workers not organizations own this human capital...and decide when, how and where they will contribute it.” As a former government department, Telekom Malaysia has inherited the 28,000 employees, all the systems, technologies, business network and customers of Jabatan Telekom Malaysia, In 1996, the value of the human capital in Telekom Malaysia which in this case refers to only the salaries and allowances to the employees, stood at RM 836 million and in 2003, the value of its human capital was RM 1,412 million, an increase by 69% within seven years (Telekom Malaysia Annual Report, 1996, 2003). That is only in term of salaries and allowances, how about long-term relationship, know-how and others? This means that the only way for Telekom Malaysia to have an edge over its competitors will be to develop and put greater the use of its intellectual assets. In this “new economy” or “knowledge economy” one principally driven by information and knowledge, the true value of Telekom Malaysia can only be achieved by developing its intellectual capital. This is the critical aspect of its present and futurevalue ~ no longer confined to the managing of network, systems and physical assets of Telekom Malaysia. Indeed, for the first time in business history, the workers, not the organization, owns the means of production, the knowledge and capabilities they possess and they decide how and where to apply it 1.2 Research Problem In 2001, the nation’s regulatory requirements have created five new-licensed telecommunication services operators. Accordingly, to remain competitive, Telekom. Malaysia has reorganised itself into five major business groups to response to this new challenge. Also, under it’s “Change Program” Telekom Malaysia has spent a lot of effort, time, money and other related resources worth estimated at RM 10 million since 2001 to 2003 to provide the infrastructure and implementing projects and programs, such as employee training and development, customer relations management, quality improvement activities and culture transformation programs in order to achieve it's vision (Telekom Malaysia, 2003). The vision is to become “The Communication Company of Choice”, which focuses on delivering exceptional value to its customers and other stakeholders. In attempting to achieve Telekom Malaysia’s vision of being the communication company of choice, it faces these major-problems in the area of intellectual capital: () The deteriorating trend of fixed network telecommunication services customers and market share of telecommunication services. Could this be due to the degree of availability and utilisation of intellectual capital? (ii) The information on the effective management and leveraging of intellectual capital is either not available or not utilised for determining Telekom Malaysia’s strategic direction. I's as. if intellectual capital does not matter in the realisation of its business strategy. (iii) The influence of intellectual capital to. Telekom —Malaysia’s performance, in the present as well as in the future competitive business environment and K-economy is not being addressed at all.(iv) The effectiveness in implementing the “Change Program” and the results from the budget spent, times and effort for the program and other related activities are not known for further actions and improvements. Hence this study aims to address the importance of intellectual capital on the performance of Telekom Malaysia and this study also intends to show that the dimension of spiritual capital is integral to the development of intellectual capital that will contribute to the outstanding performance of Telekom Malaysia as proven in many sworld-class” corporations. 1.3 Research Objectives The purpose of this two-phase, sequential mixed methods case study will be to obtain statistical and quantitative results from a sample, secondary data and then follow up with few individuals to explore those results in more depth for following research objectives: a (a) So far, few empirical studies of intellectual capital conducted such as by Bontis (1998), Youndt (1998), Bontis ef ai. (2001), Shock (2002) and Hayton (2002), provide some general evidence that intellectual capital or @ component of intellectual capital is positively associated with measures of various organizational performance. In this study further investigation is to be done on the influence of intellectual capital on the performance of Telekom Malaysia specifically on the organizational and business leadership, operating efficiency and business performances through the ‘case study’ of Telekom Malaysia. It is also necessary to investigate the effect and influence of the newly defined 4" component of intellectual capital in this study — the “Spiritual Capital’ on the performance of an organization. This study is timely with the eagemess of all parties in Telekom Malaysia to know the results from the implementation of the ‘Change Management Program’ for the culture transformation of Telekom Malaysia, which started since year 2000.(iii) (iv) ) To identify what is the level of intellectual capital availability and which component of the intellectual capital has a more profound effect or critical influence on the performance of Telekom Malaysia. To investigate the importance of knowledge management, managing and leveraging of intellectual capital in Telekom Malaysia, to achieve business competitiveness, in the present and future business environment as well as to bring out relevant and significant performance improvement, in its critical business issues. The accurate information on the degree of effectiveness, in managing and leveraging of intellectual capital in Telekom Malaysia will form the major issues, for Telekom Malaysia to develop its strategy and future business direction. To propose to Telekom Malaysia, to accept, adopt and apply the recommendations proposed in this study, with the appropriate ‘modifications and business performance problems, as well as use them in their future business planning processes to their current management. In the first phase, quantitative research questions with respondents from Telekom Malaysia’s executives will address the relationship of intellectual capital, knowledge management, managing and leveraging of intellectual capital to Telekom. Malaysia’s performance. In the second phase, the secondary data will be analysed for the relationships and corroboration amongst variables in the survey, and qualitative methods will be used to probe significant quantitative results by exploring aspects of the whole relationships and corroboration of the research subject with the participation from higher management of Telekom Malaysia. Finally triangulation through the multiple data provides comprehensive perspectives of the research subject. 14 Justification for Study The justifications for this study are: wo Many of the past researchers in the field of intellectual capital have confined their efforts to only using mainly the quantitative research methodology. Very few have combined their studies with the case study approach, and very few still have used the mixed method methodology toGi) Gi) (iv) study this subject, to gain much deeper insights into the subject, to learn about the many idiosyncrasies within an organization that may hamper its prosper use, and the full benefits that an organization can benefit if it is used correctly. Although Gillett (2002) and Zohar (2004) use the term ‘spiritual capital” in their articles and books, their spiritual term is not within the intellectual capital framework discussed in all the available literatures. A study on the subject does exist, but it is not done empirically. A case study is not done on the subject and as yet, there is no theoretical framework being offered to explain its conceptual framework. The present studies, give a comprehensive meaning to the term ‘spiritual capital’ as the 4° component of intellectual capital. The past studies mostly investigate the components of intellectual capital — human capital, structural capital and relational capital and their influence on performance. None of them has studied the importance of managing and leveraging the intellectual capital, only the components of intellectual capital themselves. The importance of managing and leveraging the intellectual capital becomes one of the major interests in this study. In general, this research offers significant contributions to the available literature on intellectual capital. There has been no study done on the intellectual capital available in Telekom Malaysia before this, whether on the level of its presence or it’s utilisation in the company neither for further planning and actions nor to leverage it to achieve all-rounds benefits for Telekom Malaysia, As explained earlier, despite the efforts, time, and other resources Telekom ‘Malaysia has spent on its “Change Management Program’, the results have not seen favourable, Since intellectual capital could be efiectively managed and leverage, for the improvement of Telekom Malaysia’s performance, this study is important and timely for Telekom Malaysia to gauge the effectiveness of the implementation of the change management program. This cost includes the professional fees for the consultants, producing the numerous reports generated by them and the various internal departments, benchmarking exercises, and other study groups, which should finally result in significant improvement to the performance of Telekom Malaysia.(v) As such this case study involves an investigation into the ‘what’, *how* and ‘why’ such phenomena occur in Telekom Malaysia, the outcomes then will provide the necessary required strategies and actions to strengthen it’s capital management, to enable it to compete and sueceed in the current and future competitive knowledge economy. Furthermore, since intellectual capital management involves every employee in Telekom Malaysia, it would be beneficial to ascertain whether the overall objective of its ‘Change Management Program’ has affected every employee in Telekom Malaysia and whether the expected ‘change’ will be achieved, sustained and improved in the future, 1.5 Organization of Thesis The whole thesis comprises five chapters. Chapter 1 introduces the research problem and objectives of the study. Chapter 2 presents the related literatures on intellectual capital management and knowledge management. Chapter 3 presents the development of a new model of intellectual capital by including the spiritual capital Chapter 4 discusses the research design and methodology used in the study. It covers the theoretical framework and data collection processes. Chapter 5 talks about the analyses and discussion done on the data collected from the survey conducted, other secondary sources referred to and from the interviews conducted. The result — in the forms of descriptive statistic, as well as, the explanations on the relationships amongst Chapter 6 concludes the thesis by discussing the benefits of this study to Telekom Malaysia, the variables identified in the theoretical framework — is presented. Finall followed by conclusion of this study, its limitations and some suggestions for further research to follow and finally the recommendations to Telekom Malaysia, as to what it can gain from these findings, to enhance its competitiveness,1.6 Key Definitions and Concepts: “Intellectual capital"(IC) is defined as an identifiable non-monitory asset without physical existence held for use in the production or supply of products or services, for rental to other administrative purposes. There are four components of intellectual capital: a Wi (iii) a) “Human capital” (HC) is the ‘tangible’ tacit knowledge embedded in the minds of individuals which include employee competence, know how, education, innovativeness, capabilities, work related knowledge and changeability. “Structural capital” (SC) is the organizational capabilities and routines in performing business which include organizational structures, operating manual and procedures, databases, documents, information system, networking system, research and development capabilities, patents, copyright and trade marks, system and technologies. Relational capital” (RC) is the relationship between the organization and the outside environment, which includes alliances, and relationship with customers, partners, suppliers, investors, franchiser, distribution networks, government bodies and agencies, image and brand, communities, public and environment. ‘Spiritual capital” (SpC) is the “intangible knowledge”, faith, belief and emotion embedded in the minds and hearts of individuals and in the heart of organization, which includes vision and direction, principles, values and culture. The individual and organization behave and act with honor, integrity, sincerity, honesty, truth, trust, love, moral and ethic. It also includes motivation, self-esteem, courage, strength, commitment, teamwork, determination, desire, enthusiasm and team spirit. It focuses on interrelationships, interconnectedness and interdependency for sustainable development with the view to achieve final prosperity and happiness for all. It governs how the other three capitals should be used.10 Summary Telekom Malaysia has inherited many systems, technologies, types of business network, customers and 28,000 employee of Jabatan Telekom since 1996. As at 31" December 2004 Telekom Malaysia had 20,000 employees, 4.6 million of fixed network customers supported by various systems and technologies. In order to be competitive in the present business and in the ‘knowledge economy’, the only way for Telekom Malaysia to do so, is to have an edge over its competitors by developing and leveraging its intellectual capital, Intellectual capital consist of — human capital, relational capital structural capital and the newly proposed component, spiritual capital. This study aims to address the importance of intellectual capital on the performance of Telekom Malaysia and intends to show that the dimension of spiritual capital is integral to the development of intellectual capital that will contribute to the outstanding performance of Telekom Malaysia. This has been proven in many world class organizations. This study also will identify what is the level of intellectual capital availability and which component has a more profound effect on the performance of Telekom Malaysia, the importance of knowledge management and managing and leveraging of intellectual capital on the Telekom Malaysia's performance.CHAPTER 2 LITERATURE REVIEW 2.1 Introduction Economists frequently describe the basic resources necessary for an industrial enterprise in terms of the three classic kinds of assets — land, labour and financial or other economic assets (Sullivan, 2000). During the last two decades, the business environment have progressively moved into a knowledge-based fast-changing, technology intensive company in which investments in human resource, information technology and research and development have become essential in order to strengthen the firm’s competitive position and ensure its future viability (Canibano,2000). Itami (1997) suggests that resources consists of physical, human and monetary resources that are needed for business operations to take place and information-based resources, such as management skills, technology, consumer information, brand name, reputation and corporate culture. In many cases, knowledge firms such as Microsoft, Xerox, Dow Chemical, Hewlett-Packart, Eastman Chemical and others have their marketplace value at a price far higher than their balance sheets warrant (Sullivan, 2000) and in many instances there are companies being bought for amounts far in excess of market capitalisation due to the market capitalisation is not the true worth reflection of their companies (Guthrie and Petty, 1999). The company’s value is more than the tangible assets, the source of its value and wealth is no longer the production of material goods but the creation and manipulation of its intangible assets (Goldfinger,1997) and its ability to systematically leverage it and convert those assets into revenues (Sullivan, 2000). Conventional assets — financial and physical capital — have not disappeared and will not, but given how important knowledge has become, as a product and process that add value to work, it’s inevitable that intangible asset would become a more importantasset for organizations — their most important assets (Stewart, 2001) comparable to the traditional land, labour and tangible assets (Sulivan, 2000). The current business environment cannot be predicted with relative ease as before due to the messy and complex challenges that are happening now and in the future. Many organizations believe that, embarking into the knowledge economy is one of the best business strategies to making sure for the organization to survive in the very competitive and turbulent environment. Companies have recently given focus on knowledge and intellectual capital by managing and leveraging their intellectual capital with the hope to improve their immediate and long term business performance. The works of Sveiby (Sveiby, 1989), Brooking (Brooking, 1996), Edvinson (Edvinson and Malone, 1997), Stewart (1997), Saint-Onge (Saint-Onge, 1997), Lev (Lev, 1997) Sullivan (1998), Johan and Roos (Roos er al, 1998) have influenced the thinking about the non-tangible factors, the ‘weightless wealth’ that determine the success of a company (Andriessen, 2001). Generally intellectual capital is considered to be the stored knowledge possessed by an organization, which may be tacit knowledge, personal knowledge possessed by an employee and may be explicit knowledge, codified and stored by the organization and available to individuals throughout the structure (Nonaka & Takeuchi, 1995). Various convincing justifications have been forwarded for the need of measuring, reporting and managing intellectual capital (Brooking, 1996; Petty and Guthrie, 2000; Sveiby, 1998; Edvinson, 1997; Edvinson and Malone, 1997; Mouritsen, 1998; Allee, 2000; Marr ef al., 2003) and various research projects have been made to explore other related details of this subject such as ‘Measuring and reporting intangibles to understand and improve innovation management’ (Meritum) then E*KNOW-NET (Petty and Guthrie, 2000), which are supported by the European Commission. The importance of intellectual capital is emphasised in the revolution in information technology and the information society, the rising importance of knowledge and the knowledge-based economy, the changing patterns of interpersonal activities and the network society and the emergence of innovation as the principle determinant of competitiveness (Petty and Guthrie, 2001). All the above efforts, researches and developments, show the importance of intellectual capital as a major instrument in the determination of enterprise values and national economic performance (Mouritsen, 1998).1B Telekom Malaysia as a former government department, since 1996 has inherited the systems, technologies, business network, customers and 28,000. thousands employees of Jabatan Telekom Malaysia and in this ‘new economy” or ‘knowledge economy’ ~ one principally driven by information and knowledge. The true value of Telekom Malaysia can only be achieved by developing its intellectual capital. This is the critical aspect of its present and future value — no longer confined only to the managing of network, systems and physical assets of Telekom Malaysia, This means that the only way for Telekom Malaysia to have an edge over its competitors will be to develop and put greater use of its intellectual capital 2.2 Intellectual Capital and Business Performance Measuring performance is something that all organization do (Parker, 2000) B.W. Associates (1994) defines performance as the manner or quality of functioning, which implies that management of performance is concerned with the manner or quality of managing and Kaydos (1991) defines performance as how well something does what it is supposed to do. In principle, two basic objectives of performance are — accountability and improvement (Foster, 2001). Performance measurement is essential for achieving and maintaining high levels of productivity and quality (Sinclair & Zairi,1995), its provides the link between strategies and actions (Dixon er al, 1990), for good management control and planning, 1990, Roberts,1994). It can encourage transparency, integration of processes, internal communication, a and for developing and motivating an organization (Nanni ef al culture of improvement (Foster, 2001) and motivate managers to act in a way that is consistent with the organization’s plan. The underlying theory is that, what gets measured get done (Roberts, 1994), Through performance measurement, organization can have the answer to — what was happened, why has it happened, is it going to continue and what we are going to do about it? (Nooreha, 2002). Performance measurement involves the systematic gathering, analysis and reporting of information to management (Mokhtar, 2002) and it is the process of quantifying past actions (Neely, 1998).A good performance measurement system must4 link operations to strategic objectives, integrate financial and non-financial information and must be customer focussed (Mokhtar, 2002). Some of the performance dimensions are competitiveness, financial, quality of service, flexibility, resource utilisation and innovation (Nooreha, 2002), Generally organizations measure performance due to various reasons such as — to identify success, to identify achievement, to understand the processes, to identify where problems are and the necessary improvements needed, to confirm improvements, to ensure decisions made are based on facts not on emotion or intuition (Parker, 2000). Intellectual capital has been identified as a key resource and driver of organizational performance and value creation (Itami, 1991; Teece, 1998: Mayo, 2000). Narver and Slater find that market orientation, relational capital and business performance (ROA) are strongly related (Narver and Slater, 1990) and Jaworski and Kohli (1993) find that market orientation is an important determinant of performance on. his study of 222 US business units. Intellectual capital, which is considered the most important intangible asset in the company, significantly affects the valuable change and success of the organization through understanding, developing and managing the company’s intangible assets (Nonaka & Takeuchi, 1995). Youndt (1998) empirically shows the following relationships between intellectual capital and performance: (i) Human capital is positively related to sales growth but is not significantly related to financial returns. (ii) Relational capital is negatively related to sales growth and shows no significant relationship with financial returns. (iii) Structural capital is not significantly related to sales growth but is positively related to financial returns. (iv) Human capital is not significantly related to reduced organizational costs but it significantly relates to increased customer benefits. (v) Relational capital shows no significant relationship to increase benefits but is significantly related to reduced organizational costs.15 (vi) Structural capital isnot significantly related to reduced organizational costs, but is positively related to increased customer benefits. Using a survey data, Bontis (1998) shows the following relationships between Likert-type measures of intellectual capital and business performance: (i) Human capital is significantly related to structural capital. (i) Human capital is significantly related to relational capital. (iii) Structural capital is significantly related to business performance. (iv) Relational capital is significantly related to business performance. Again using a survey data, Bontis er ai. (2000) show the following relationships between Likert-type measures of intellectual capital and business performance for Malaysian industries: (i) Human capital is significantly related to relational capital for service industries and non-service industries. (ii) Human capital is significantly related to structural capital for non- service industries. (ii) Human capital is not significantly related to structural capital for service industries. (iv) Relational capital is significantly related to structural capital for service industries and non-service industries. (v) Structural capital is significantly related to business performance for service industries and non-service industries Walker (2001) empirically shows the following relationships between human capital and performance measurement: (i) The value of human capital is significantly related to the firm’s performance measurement of human capital market value in the low knowledg -base industry. (ii) The value of human capital is significantly related to the firm’s performance measurement of human capital market value in the high knowledge-based industry. (ii) The value of human capital is not significantly related to the performance measurement of productivity, profitability or market16 evaluation in either low knowledge-based industry or high knowledge- based industry Shook (2002) shows the following relationships amongst intellectual capital, the analyst and investment broker attitudes: (i) Intellectual capital value is a factor of investment decision with at least an equivalent importance to traditional financial and physical asset values. (ii) Intellectual capital value is at least a perceptual value to the analyst or investment broker making value determinations for company growth, development or valuation Shell International verifies the impact of intangible assets such as employee satisfaction, organizational culture, environmental and social responsibility on their corporate strategy and financial performance (Marr er al. 2002, 2003). Beside intellectual capital, knowledge which has a strong relationship with intellectual capital also forms the foundation of company business performance (Marr et al., 2002), it is a strategic resource for the company to develop its sustainable competitive capability (Davenport & Prusak, 1998) and knowledge stocks, flows and creation are closely related to business performance (Grant, 1996; Bontis, 1999). However the most knowledgeable firms are not always the most profitable. Knowledge only leads to superior performance if the industry characteristics enable the knowledgeable company to appropriate the profits from the new ideas (Bierly and Daly, 2002). The survival and performance sustainability of an organization in the long run will be determined by how the right capital mix between physical and intellectual capital of the organization is leveraged to satisfy the interest of its stakeholders — shareholders, creditors, suppliers, customers, communities, employees including the whole human race, present and future and the planet itself, Intellectual capital which includes of human capital, structural capital and relational capital will play a central role in fuelling the success of companies in this century (Zohar, 2004).17 2.3. Definition and Classification of Intellectual Capital In the past, in line with the maturity of intellectual capital (also considered as an intangible asset), there are many definitions of intellectual capital, which have been and are still being offered and discussed in various literatures, especially in the Joumal of Intellectual Capital. Webster Dictionary defines ‘capital’ as anything which can be used to increase one’s power of influence. The Oxford English Dictionary defines ‘capital’ as ‘that which confers wealth, profit, advantage or power” and Dictionary.com defines “capital” as the entries of balance sheet showing all properties both tangible and intangible which includes cash, stock, inventories, property rights and goodwill. The International Accounting Standard Committee (IAS 38, 1998) defines intellectual capital or intangible asset as, “an identifiable non monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others or for administrative purposes. An asset is a resource, (a) controlled by enterprise as a result of past events, and (b) from which future economic benefits are expected to flow to the enterprise”. Klein (1998) suggests that intellectual capital is knowledge, experience, expertise, and associated soft assets, rather than their hard physical and financial capital. In most cases, intangible assets are defined as (capital) assets that lack physical substance but which are likely to yield future benefits (Canibano er al, 2000) A summazy of most of these definitions is listed in Table 2.1 for the purpose of comparison amongst the contemporary definitions of intellectual capital(ICy intangible asset,Table 2.1: Definition of intellectual capital (IC) ‘Skandia (1994) 18 IC is the aggregate sum of intangible values which comprises of: (i) Human capital — knowledge, skills and capability Structural capital — everything that remains when the employees go home: databases, software, manuals, trademarks, organization structures, etc. Customer capital, is the relationship built up with the customers, and is a significant part of structural capital Llectual Capital Human Capital Structazal Capital [ Customer Capital ] nization Capital Process Capital [ Intellectual property [ Thtangible assets Brooking (1996) IC components are: a Gi) ii) (iv) Market assets Human-centered assets Intellectual property Infrastructure asset Intellec- tual Assets Human. entered assets Market Assets Bontis (1996) IC includes three sub-domains: a (ii) Gi) Human capital Structural capital Customer capital With two supporting drivers: ‘Trust Culture @ (i) Intellectual Capital Structural DriversRoos et al (1997) 19 includes’ (i) Thinking assets - human capital i) Non-thinking assets — structural capital [ Thinking eset Pm cpt Non-thinking Assets — structural capital Sveiby (1997) IC consists of three invincible assets: (i) Employee competence Gi) Internal structure Gii) External structure Stewart (1997) IC as intellectual material which consists oft (i) Knowledge (i) Information (iii) Intellectual property (iv) Experience That can be put to create wealth Intellectual Capital Knowledge Intellectual Property ‘Sullivan (1998) IC is knowledge that can be converted into profits. IC comprises three elements: (i) Human capital Gi) Intellectual assets Gii) Structural capital Complementary Business Asset Intellee ual Homan |] Sea, Manufacturing, Capital . Distribution, Sales ‘Stmuctural CapitalEdvinson & Malone (1997) IC consists of @ Human capital - what people can do individually and collectively. System component ~ knowledge in firms, which is independent of people. includes patents, contacts & databases. Market component — relationship between organization & outsiders Values, Market component Haanes & Iowendahl (1997) IC is intangible resources of : @ (ii) ‘Competencies — various abilities to perform and are reflected at individual & organization level. Relationship — reflected in the reputation of the company — customer loyalty Both of these exist in an individual & collective fashion. TANGIBLE RESOURCES INTANGIBLE COMPETENCE «Information based + Skills CaBabipities Aptitudes RELATIONAL + Reputation Loyalty + Relations Saint-Onge (1997) Prefers knowledge capital to IC. Knowledge capital is the sum of : @ Human capital — capabilities of individual to provide sohitions to customers. Relational capital - the depth, width, attachment & profitability of franchise Structural capital - the capabilities of organization & on to meet market, requirements‘Andriessen & Tissen (2000) Five categories of intangible assets @ Skills and tacit knowledge (STK) Collective values & norms (CYN) Technology & explicit knowledge (TEC) Primary management processes.(PMP) Assets & Endowments (A&E) Guthrie & Petty (2000) IC consists of: @ Internal: Organization (structural) capital External: Customer (relational) capital Employee competence: Human capital Organization Mayo (2000) ‘Most common forms of IC @ Customer (External) capital — customers’ relationship, loyalty, satisfaction & image. Organizational (Internal structure) capital ~ systems, patents, know-how, database, knowledge, cultue. Human capital - individual competence & experience, judgment, leadership and motivation Values Copital Organizational Capital‘Allee (2000) Expanded view of IC: Tdentit & Valu (i) Business relationship — alliances & business relationship with customers, partners, suppliers, investors and government (BR) Gi) Intemmal structures ~ systems, work processes that leverage competitiveness including IT, communication & technologies (IS) (ii) Human competence(HC) (iv) Social citizenship (SC) (v) Environmental health (EH) (vi) Corporate identity (CI) McElroy (2002) “Modifies Edvinson’s IC model: Intellectual Capital (i) Human capital ii) Structural capital iii) Social innovation capital Socal Honan Gactwnl Capital Capital Capital = Process | Tanovation Capital YP Capiz Social Inter Innovation | | social Capital Capital Edvinson and Malone (1998) and Grafstrom and Edvinson (1999) use a metaphor as shown in Figure 2.1 to explain the idea of an intellectual capital. The tree as a metaphor of intellectual capital is partly a story of interlinked activities that happen all over the tree at any particular moment in time, and illustrates not only the relation23 between past and future, but also the intervention that is necessary in order to make fruition maximally efficient (Mouritsen er ai., 2001). As they further explain: “If we compare the intellectual capital to a tree, the ripe fruit of the season’s effort can be seen in the crown — ie. in the annual report’s income statement and balance sheet, The human core in the trunk is protected by the bark of customer relations and work routines. Research and planning, which the tree needs in order to survive future droughts and colds spells, is carried out in the root system. At a time marked by quick and capricious chenges in business environment, it is at the roots where the most crucial activity may take place, for future fruition.” Figure 2.1: Metaphor of intellectual capital Sveiby (1989) describes intellectual capital as a know-how capital, which consists of individual capital, and structural capital. Individual capital means the personal and social abilities, experience, professional competence, schooling and other skills of the employees. The structural capital is the organization's competence, which includes organization’s history, experience, documented handbook, computer programs and toolboxes. Skandia (1994) suggests that intellectual capital is the aggregate sum of intangible values, which comprises both human capital and structural capital. Human capital is a thinking assets (Roos ef al, 1997), it represents the knowledge, skills and capability of the individual employees to provide solutions to the customers (Skandia, 1994, Sullivan 1999), it represents the individual knowledge stock24 of an organization (Bontis et a, 2001) and it is the firms collective capability to extract the best solutions from the knowledge of its individuals (Bontis, 1998). Saint-Onge (1997) defines human capital as capabilities of individual to provide solutions to customers and what people can do individually and collectively (Edvinson & Malone) whereas Allee (2000), Sveiby (1997) and Guthrie & Petty (2000) define human capital as an individual competence and experience, judgment, leadership and motivation (Mayo.2000), Human capital has also been defined on an individual level as a combination of genetic inheritance, education, experience and attitudes about life and business (Hudson, 1993). OECD (1999) defines human capital as the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances. Haanes & Lowendahl (1997) who categorize intangible resources into competence and relational resources defines competence as the ability to perform a given task which includes knowledge, skills and aptitudes. Human capital is important because it is a source of innovation and strategic renewal, whether it is from brainstorming in a research lab, re-engineering new processes or improving personal skill and the essence of human capital is the sheer intelligence of the organizational member (Bontis, 1998) Structural capital is a non-thinking asset (Roos e7 a/., 1997) which consists of everything that remains when the employees go home — databases, customer files, manuals, trademark and organizational structure (Skandia, 1994). It is the knowledge in the firms, which is independent of people, which includes patents, contacts and databases (Edvinson & Malone, 1997) and it is the capabilities of organization to meet the market requirements (Saint-Onge, 1997). Sullivan (1998) defines structural capital as the support that firms provide to their human capital such as information systems, computer software, work procedures, marketing plan and company know-how. Mayo (2000) and Guthrie & Petty (2000) instead term it as organizational capital — information systems, networking system, management processes, patents, database and Allee (2000) term it as intemal structures — systems, work processes that leverage competitiveness including information technology, communication and technologies. Sveiby (2001) classify the internal structure as a result of people work internally in an organization such as patents, concepts, model and administrative system which is owned by the organization and some of it will remain even if a large number of employees leave, Structural capital arises from processes and organizational value,25 reflecting the extemal and internal focuses of the company, plus renewal and development value for the future, Organization with strong structural capital will reach, its fullest intellectual capital potential and will have a supportive working culture for its employee to learn and be innovative (Bontis,1998, Bontis e7.a/,1999), it provides the environment that encourages the human capital to create and leverage its knowledge (Sullivan, 1998). The essence of structural capital is the knowledge embedded within the routines of an organization (Bontis, 1998) Relational capital is the relationships which include internal and extemal stakeholders (Roos ef al, 1997). It exists in an individual and collective fashion reflected in the reputation of the company especially in the relationship with its customers. It is customer's loyalty (Haanes & Lovenahl, 1997). It is the depth, width, attachment and profitability of franchise (Saint-onge, 1997). Sveiby (1994) terms it as customer capital and defines it as the relationship built up with the customers and image, customer's loyalty and satisfaction (Mayo, 2000) and market information used to capture and retain customers (Stewart, 1997). Edvinson & Malone (1997) term relational capital as a market component which is the relationship between organization and outsiders, Brooking (1997) terms it as market assets which includes brands, customers, customers loyalty and distribution channels. Relational capital encompasses the knowledge embedded in all the relationships an organization develops whether it be from customers, from the competition, from suppliers, fiom trade associations or from government (Bontis, 1999, Allee, 2000) and Allee (2000) expand it even to include the environmental health, Contemporary classification schemes have divided intellectual capital into the categories of external (customer-related) capital, intemal (structural) capital and human capital (e.g. Sveiby, 1997; Roos ef al., 1997, Stewart, 1997; Edvinson and Malone, 1997; Petty and Guthrie, 2000). An expanded definition proposes by Allee (2000) still falls within this framework. The proposal of social innovation capital by McElroy (2002) is actually another way of looking at human capital. In conclusion, it appears that most of the definitions of intellectual capital listed above include human capital, structucal capital and relational/customer capital.2.4 The Need for a Redefinition of Intellectual Capital In the race to show a strong financial performance for their companies, there are business leaders who utilise their intellectual capital by manipulating figures and reports to portray that their companies are in good health, to the shareholders, authorities and to the public. In the United States, a few cases of accounting irregularities of Fortune $00 companies, which happened in the year 2002, such as Enron, WorldCom, Anderson and a few other corporate companies, resulted in the fall of the stock market and the decline of investors’ confidence (Chatzkel, 2003). More than that, these incidences also affect the credibility of the industry, the present financial system and the organizations that practise knowledge management. In Malaysia most of the cases reported involved the unethical use of political power by the government especially in the giving of projects and licenses related to the government projects or government related companies such as North-South Highway, Bakun Dam, Malaysian Airlines System, and Celcom Sdn.Bhd (Gomez & Jomo, 1999), Table 2.2a and Table 2.2b show the top 20 list of year 2001, 2002, 2003 and 2004 of “Global Most Admired Knowledge Enterprises (MAKE)” yearly study that seeks to identify organizations that are creating, sharing and using knowledge to become leaders in the new e-business economy (Teleos, 2001, 2002, 2003, 2004). Table 2.2a : Top 20 “Global Most Admired Knowledge Enterprise” yearly report 1999 [2000 | 2001 rank 2002 list] 2003 list 2004 list rank_| rank i | 2 [1 J General Accenture [Accenture | Accenture Electric 8 | 3 | 2 [Hewlett— | British ‘Amazon. ‘Amazon. Packard Petroleum | com com. 4] 1 [3 [Buckman Buckman — | British British Laboratories _| Laboratories | Petroleum _| Petroleum - | 10 | 4 | World Bank | ClaricaLife [Buckman | Buckman Insurance __| Laboratories | Laboratories 1 | 6 [5 |Microsot — [Emst & ‘Canon, Dell Computer Young 2 | 16 [6 | British General Emst & Emst & Petroleum __| Electric Young Young 13 [17 [7 | Siemens Hewlett— | General General Packard Electric ElectricTable 2.2b : Top 20 “Global Most Admired Knowledge Enterprise” yearly report (continue) 18] 11 ] 8 ] Skandia Intematio. [Hewlett | Hewlett— nal Business | Packard Packard Machines : - [9 | McKinsey & [KPMG Infosys IBM Company Technologies — [5 [10] Cisco McKinsey [IBM Infosys Systems & Company ‘Technologies 14 4 11 | Anderson Microsoft McKinsey & | Intel Company S| 7 [12] Erst& Nokia Microsoft | McKinsey & Young Company - | - [13 ) KPMG Royal Nokia Microsfot Dutch/Shell, 3 | 8 [14| Xerox Siemens | Pricewater- | Pricewater- house house Coopers Coopers 12 13 | 15 | International | Skandia Royal Royal Business Dutch/Shell | Dutch’/Shell Machines 6 [14 [16 [Accenture | Toyota Siemens ‘Samsung - | - |17/ClaricaLife [Unilever [3M Siemens Insurance 10 | 19 | 18] Royal US Toyota Motor | Toyota Motor Dutch/Shell__| Government = [= [19 | Sony World Bank | World Bank | World Bank =| [20 | Schlumberger [Xerox Xerox Xerox, In the year 2002 Global MAKE Report, there is a section named *The Enron Factor’ which reported on the Anderson’s collapse as a result of Enron’s bankruptcy Until the 2002 global MAKE study, Anderson had been a Global MAKE Winner four years in a row and in year 2002 Anderson did not receive a single vote from the 2002 Global MAKE expert panel. This had wide and far-reaching effects and repercussions to the entire professional and consulting services companies ie. the knowledge- intensive companies. In fact Cap Gemini Emst & Young, Emst & Young, KPMG and Pricewaterhouse Coopers all receive fewer nominations as the MAKE finalists in year 2002, compared to previous years. As a group they were marked down in the “success in maximising the value of the enterprise’s intellectual capital” knowledge performance dimension (Teleos, 2002).28 It is very likely that investors and shareholders will begin to question the veracity of the annual financial reports prepared by the professional accounting firms. Can they be trusted? After all they have been manipulating and misrepresenting financial figures for years by covering up and hiding the truth, and doing so deliberately and consciously at that! What assurance have we got that these professional accounting firms are not another Arthur Anderson, and their clients another Enron in the making? Why is this happening? Who are the people doing this? Are they not the very best and brightest produced by the very best and the most hallowed institutions ~ North- Western University, Harvard Business School, University of Chicago, just to name a few. McElroy (2002) explains that bad practice is nothing more than bad knowledge in use and that when this happens in an organization, it is because the knowledge- processing capability in those organizations is profoundly broken or at least dysfunctional. Most of the time misbehaviour and mismanagement happen not because the leaders of these organizations do not have the knowledge, but because they fail to practise the knowledge they have. They know what is right and what is wrong, what is good and what is bad, what is sound and what is unsound but choose to practise, deliberately and consciously, those that are wrong, bad and unsound, It appears that itis perfectly acceptable, that to know well is enough, even if one does not practice that goodness. Worse still perhaps, is the notion that it is still acceptable to practice what are contrary to those good and sound principles, as long as you do not get caught. Chatzkel (2003) in his interview with Hubert Saint-Onge on critical issues raised by the phenomena of the Enron collapse quoted Hubert Saint-Onge who comments that, since in the intangible world there are no guardrails, the importance of core values, moral fabric and behavioural elements increases. Strong and sound govemorship and stewardship need to be exercised to guarantee that a meaningful checks and balanced process exists in the management system. The above examples of incidences involving Arthur Anderson, Enron, WorldCom and Global Crossing (Chatzkel, 2003) show that intellectual capital is not only made up of intellectual assets but a mixture of both intellectual assets and intellectual liabilities (Caddy, 2000). Knowledge and intellectual capital, on its own and by itself, is not inherently bad, even if't is knowledge and intellectual capital about evil.29 Therefore it appears that the issue this study has to grapple with is how to minimize intellectual liabilities and maximize intellectual assets, ie. how to make sure that individuals and organizations possessing the appropriate intellectual capital leverage this capital for the benefits of the individuals, the organizations, the shareholders, the investors and the general public. Not the other way around! 2.5 Deficiency of Contemporary Definition of Intellectual Capital In the above definitions of intellectual capital, Bontis (1996) includes ‘trust’ and ‘culture’ only as drivers. Trust and culture are not part of intellectual capital. McElroy (2002) quotes. that in the theory of social capital trust, reciprocity, shared values and norms are all the things that add value in a firm or between firms. Andriessen (2001) discusses the weightless wealth of companies as consisting of intangible asset — the products of the right side of the brain and in the hearts of people. These include among others, the corporate culture and the charisma of leaders. Andriessen, however does not label these as “intellectual” assets. Mayo (2000) in his discussion on the contribution of human capital contribution to the value or wealth of organizations includes individual capability. individual motivation, leadership, the organizational climate or culture and workgroup effectiveness as factors that produce a climate that leads to the growth of people in the organization, To include values, culture, trust and motivation taken together only as a driver, as a value-add, collectively as a factor, as an influence or as an underpinning element to the intangible assets still does not represent the actual truth, the holism and whole “big picture’ of intellectual capital belonging to an individual or an organization, How about the products of the right side of the brain and in the hearts of people such as an act of honor, sincerity, trustworthiness, self esteem, courage, benevolence, love, team spirit and others? Are they not the product of intangible assets? The values, culture and ethic — do these items not fall within the definition of intangible asset? These are the deficiencies of the contemporary definitions of intellectual capital since the dimensions mentioned above absolutely fall within the definition of the intangible asset discussed above and they are likely to yield future benefits to the individuals and organizations.30 This thinking is in line with a few authors such as Brooking (1996) who maintains that corporate culture is an asset when the culture of an organization reinforces the achievement of the overall goals. Hall (1998) says that cultural capital is one way for the values to be understood in a cultural context, within an organization, specifically the intemal organization environment that includes communication issues with individuals and groups, values and vision, Andriessen & Tissen (2000) also lists collective values and noms, the corporate culture of an organization as one of the intangible assets and Marr et al. (2002, 2003) who in their case studies, carried out at three e-business companies find out that the culture in the organization is a key asset. Cultural assets embrace categories such as mission, corporate culture, entrepreneurial spirit, organizational values and management philosophies To address the above issues, that is, to manage the issue of intellectual liability (Candy, 2000), manipulation of financial reports and other activities that destroy values and more importantly to understand the sustainability of a few successful companies, the understanding of intellectual capital should be broadened to include the whole range of intangible assets. It is timely to look at the intellectual capital as a more practical, operational and long-term sustainable business concept, which has been accepted and practised by a few good and successful companies. Details of these companies will be discussed later. In this study, a “bigger picture” and a holistic understanding of intellectual capital is suggested by proposing a new definition of intellectual capital — to include “Spiritual Capital” (SpC) as the fourth component or capital of the intellectual capital. The role of spiritual capital in intellectual capitel and its influence on the performance of organization will also be discussed to justify the inclusion of spiritual capital in the new definition of intellectual capital, 2.6 Spiritual Capital in Practice The presence of spiritual capital within organization which are practiced by some world-class organizations can be seen, and they have contributed for their better sustainable performance. Zohar and Marshal (2004) quoted the examples of companies who possess spiritual capital such as Clark’s Shoes, Rowntree’s Chocolates, Coca-Cola, Amul from Gujarat, India, Van City credit Union from Vancouver, British Petroleum,31 and Starbuck. Gillett (2002) gives examples of Nortel, JetBlue Airways, Tom’s of Maine as successfull companies who adhere to the spiritual capital principle. In this discussion, this study would like to highlight a few examples of successful companies who possess and practise spiritual capital in their businesses such as: i. Gillett (2002) told the story of AT & T Canada Long Distance Services, a Canadian telecommunication company which had suffered a loss in revenue, low products and service qualities, lowest level of employee morale in 500 North American companies and high tum over of higher managers. With the actions taken by Catucci, the CEO who is sent by AT & T United States in building up the intellectual capital, restoring financial capital and creating spiritual dimensions — the power of purpose, serving the whole, guided by values, collaboration and unity and inspiration by higher management to the whole organization had turnaround the company to become a successful company in three years in every aspect of performance indicators ~ financial, products and services, customer satisfaction and employee’s satisfaction, The achievement is further accelerated by the CEO leadership who practice the spiritual dimensions ~ motivation, beliefs, values, expectation, energy and connection and responsibility to make things happen, in managing the whole organization. ii, Velasquez (1998) told the story of Merck & Company, a global research-driven pharmaceutical company when it deals with the issue of ‘river blindness’ which afflicts 16 million people living along the banks of rivers in the tropical regions of Africa and Latin America. Merck & Company decided to provide fund to develop the dru Ivermeetin, although they knew they could not recover the $100 million of the development cost. The company was morally obliged to proceed in spite of adverse financial benefits. Afier seven years of successful development of the drug and nobody responded to buy the new pill, Merck & Company decided to give the drug away free to millions of potential victims. Asked why the company had invested so much money and effort into researching, developing, manufacturing and distributing a drug that makes no money, Dr. Roy ‘Vagelos replied that once the company suspected that they have theiii, iv. 32 solution to the disease, the only ethical choice was to develop it. Moreover, people in the third world “will remember” that Merck helped them, he commented, and “would respond favourably to the company in the future” Lucas (1999) explains the “ten clues to the presence of passion” shown by John Chamber and other Cisco employees which include — willingness to conitont reality, ability to discern the truth about who we are, what we want and need, alignment between personal and organizational aspirations, desire to make a difference, love for labor, indignation over conditions and being young at heart. Harris and Brannick (1999) say that Cisco is an excellent example of a company that excels at finding and keeping superior workers through a core culture of innovation, customer service, operational excellence and spirit where excellence is achieved by unleashing people’s limitless energy, creativity and enthusiasm, Shell report for Royal Dutch/ Shell Group of Companies for year 2001, titled People, Planet & Profit explains the companies’ objectives to meet their economic, environmental and social responsibilities and describe how they are striving to create value for the future generation. Shell's chairman, Philip Watts explains that while Shell continues to focus on delivering robust profitability, they are also striving to fulfil their commitment to society based on their business principles. It includes using the principles of sustainable development in all Shell’s operations — taking into account of their social and environmental consequences as well as the economic dimensions. Shell believes that the long-term competitive success depends on being trusted to meet societies’ expectations. Respect for people is one of Shell's key values — underpinning how shell’s people treat each other inside their worldwide family, meet the need of Shell’s customers and respond to those touched by Shell’s activities. In fact we are not leaving this planet or handing over this planet to the future generation. We are actually borrowing this planet from the generation that is yet unborn. It seems, through it activities, Shell lives and practices these highly noble values.vi. 33 Bethune, Continental Airline’s CEO (1998) tells a complete story in on how his team has engineered one of the most dramatic comebacks in the history of business where a company which was on the verge of filing for bankruptey for the third time in a decade, in the end becomes one of the best airlines in the world. Bethune highlights the importance of company’s leaders and management team in providing direction, culture, team work, management sincerity, belief, truth and trustworthiness, spirit of honesty, willingness to face facts and doing things as honourable as possible. By doing that, they have a group of employees who are extremely trustworthy, more responsible, have a strong faith in their leaders, honest to themselves, honest to their teams and willing to change. In the process Continental unleashes a tremendous talent and creative force in the company and Continental becomes a place where people are happy to come to work. Bethune also requires that his employees link their arms and sang *kumbayah” before every shift and remember each other in their prayers every night. In conclusion as CEO, Bethune’s goal is to get the sense of value into every aspect of their operation, every customer feels valued in every transaction and every employee feels valued everyday. Gestner, Jr. IBM's CEO (2002) describes how IBM in 1990 had its most profitable year ever but in 1993 IBM was losing $16 billion and became a company listed in the watch list for extinction, He tells the story of IBM’s competitive and cultural transformation, how it rebuilds the leadership team and gives the workforce a renewed sense of purpose. IBM is a classic example of a giant in its industry that has reached the pinnacle then falls to near collapse and rises again to capture its lost position and set new agenda for growth. With decentralization, empowerment, the advent of self-managed work teams, authority to make decision and take action is being pushed further downwards towards those in direct contact with customers and those involved in actual operations and away from management. Workers are expected to regulate themselves and exercise self: control or self-management. In fact the performance appraisal system is fast moving in this direction.34 vii. Collin & Porras (1994) also describe how visionary companies, the best of the best in their industries for decades such as Walt Disney, 3M, HP, Boeing and Ford have experienced almost similar life histories as IBM. They have bounced back with the set goals of not only improving their financial performance through maximizing profits but with other goals to become the role models for exemplary corporate management practices around the world. viii, Despain (2003) describes the story of a lifetime experience and lesson he has learned that has enabled him to become a true leader of people in Caterpillar Inc. He describes the process of the transformation of a man and the transformation of a business, which results in the success of Caterpillar Inc. In 1990’s Caterpillar was at a crossroad, the economy was slow, markets were mature and competitors were improving their quality while lowering their prices. After much effort such as reorganization, forced right — sizing, process reengineering, plant modernization and total quality management, Caterpillar was still suffering heavy losses. But after Despain and his management team started with a *values-based” approach — putting people first, trusting them, empowering and caring for them ~ after years of effort and determination, thousands of people start exhibiting trust, mutual respect, sense of urgency, risk taking, empowerment, teamwork, commitment, continuous improvement and customer satisfaction, Caterpillar then consistently achieved their goals and drove outstanding company results as a $ 20 ~ billion corporation, 2.7 Knowledge Management and Intellectual Capital. Knowledge is the meaningfully structured accumulation of information which may be categorized as explicit or tacit (Hubert & Stuart, 1984). Explicit knowledge can be formally articulated, more easily transferred or shared but is abstract and removed from direct experience. Tacit knowledge is developed from direct experience and action often referred to as knowledge-in-practice. It is highly pragmatic, situation-specific, subconsciously understood and applied, difficult to articulate and usually shared35 through highly interactive conversation, story-telling and shared experience (Zack,1993). Knowledge must be internalized and made tacit to be truly understood and applied to practice, it is best exchanged, distributed, or combined among communities of practice by being made explicit. Once shared, explicit knowledge can be intemalized and made tacit again by reapplying it to practice. This constant cycle of tacit creation leading to explicit combination and exchange enlarges the total knowledge base of the organization (Nonaka,1995) In Islam, the importance of knowledge can be understood through the conversation between Ali, the fourth caliph of Islam after the Holy Prophet (peace be upon him) with the Khawarij tribe (Salam, 1981). The holy prophet says, “T am like a city of knowledge and Ali is the gateway to that city.” The Khawarij tribe chooses ten of their most educated and taught men, to test the truth of the prophet’s statement, by asking Ali, “which is more important and valued, knowledge or property?” Ali answers, (i) “Knowledge takes care of you, while you have to take care of properties. (ii) Knowledge, because with a lot of properties you tend to have a lot of enemies, but with a lot of knowledge you tend to have @ lot of friends. (ii) When you give away your properties, they become less, while the more you give away your knowledge the more it grows. (iv) Those with a lot of properties are called ‘stingy’, while those who are knowledgeable are considered leamed are called by honorable and respectable names. (v) Those with properties are assessed in the Day of Judgment, while those with knowledge are duly rewarded on that they. (vi) There are a lot of thieves after your properties, there is none after your knowledge. (vii) Knowledge is the properties of all prophets, because knowledge causes those who possess it to have hearts that are soft and crystal clear, while those with properties have hearts that are hard, (viii) Properties grow less with time, while knowledge will not become less although it may not increase.”(Salam, 1981).36 In another occasion with a man named Kumail, Caliph Ali Abdul Mutalib the fourth caliph of Islam, said: * Oh Kumail, Knowledge is better than material wealth, Knowledge takes care of you, whereas you have to take care of material wealth. Knowledge is the judge, whereas material wealth has to be judged. Material wealth becomes less, when you spent it; knowledge on the other hand grows when you spent it.” Caliph Ali adds that, “a person who is knowledgeable and practices what he knows is far better than those who fast, practice qiyamullail (ie. performs night prayers) and performs the “jihad”. When a knowledgeable Muslim dies, Islam will be that much poorer and adversely affected, which cannot be put right by any other person” (AL-Ghazali, 1975). Intellectual capital and knowledge have a very strong relationship. The definitions of intellectual capital by many authors clearly include the element of “knowledge” such as — intellectual capital is, intellectual material-knowledge, information, experience, intellectual property that can be put to create wealth (Stewart, 1999; Chatzkel, 2002), the ‘stock’ of knowledge that exists in an organization at a particular point of time (Bontis er a/., 2001). At the same time the critical role of “knowledge” in intellectual capital is highlighted by other authors such as — an organization increases its intellectual capital by creating, sharing and leveraging knowledge (Allee, 2003) and managing and integrating knowledge to develop intellectual capital (MacDougal & Hust, 2002). Intellectual capital can be seen as the framework for intangible resousces in an organization as well as a way to understand the stock of those resources. Knowledge management leverages intellectual capital through an integrated approach to create, share, and apply knowledge for desired outcomes and both intellectual capital and knowledge management are two branches of the same tree (Chatzkel, 2002) Stewart (2001) identifies three pillars for knowledge economy to stand. The first is that knowledge has become what we buy, sell and do. The second pillar is a mate, a corollary to the first: knowledge assets — that is, intellectual capital — have become more important to companies than financial and physical assets. The third pillar is the need of37 new vocabularies, new management techniques, new technologies and new strategies to exploit these newly vital assets. Knowledge is a resource of value creation with a major attribute of appreciating value with continuing use and sharing of knowledge instead of depreciating value of tangible resources (Arthur, 1996). Sveiby (2001) identifies nine basic knowledge transfers in organization which create value for the organization: (i) between individuals. (i) from individuals to relational capital. (iii) from relational capital to individuals. (iv) from individual competence into structural capital. (v) from structural capital to individnal competence. (vi) within the relational capital (vii) from relational capital to strctural capital (viii) from structural capital to relational capital (ix) within structural capital The nine knowledge transfers exist in most organization but they tend not to be coordinated in a coherent strategy due lack of accurate understanding of what a knowledge-based theory may give them and most organizations also have the legacy and cultures that block the leverage (Sveiby, 2001). The successful of knowledge transfer processes need to be supported by the whole management system of the organization including the information system, career development, reward and recognition and performance management system. Knowledge manogement involves gathering, structuring, storing, and accessing information to build knowledge. It also involves creating a culture that encourages and facilitates the creation and sharing of knowledge within an organization (Boyett & Boyett, 2001). Organizations which manage knowledge effectively exhibit the following characteristics (Zack, 1993): () Applying maximum effort and commitment to creating, sharing and applying their knowledge. (ii) Applying an appropriate level and mix of skill, knowledge and expertise to problems and opportunities. (iii) Employing an organizational and technical knowledge processing strategy appropriate to the situation.38 (iv) Engaging in effective communication as evident by the reliable, accurate, timely and meaningful exchange of information and knowledge. In this theoretical study, the relationship between intellectual capital and knowledge is best described in the metaphor of the tree as discussed before. In the above metaphor, the tree is the intellectual capital, the knowledge is the environment — the dews, and rains from the sky, the light fiom the sun, the nutrients and minerals from earth, and the fruits and emission of oxygen as the wealth created. Intellectual capital can only be developed and it grows to produce the desired wealth in an organization through the availability of healthy and the appropriate use of knowledge, which is flowing and used throughout the organization. The life cycle of the tree follows a set of inscrutable laws and principles in its close relationships with earth, rain, sun, other trees, other living things as well as within its internal system, amongst its roots, trunks, branches, leaves and fruits. This metaphor will be used as a foundation in developing, the holistic theory of intellectual capital with the inclusion of spiritual capital as one of the important components of intellectual capital and the importance of knowledge in relation to the intellectual capital that will be leveraged together to improve the overall performance of the organization Summary Through many research, efforts and studies, intellectual capital has been identified as a key resource and driver of organizational performance. From the studies of the fifteen current definitions, intellectual capital can be summarized as consisting oft i) Human capital — the ‘tangible’ tacit knowledge embedded in the minds of individuals which include competence, know-how, education, innovativeness, capabilities, work related knowledge and changeability. ii) Structural capital - the organizational capabilities and routines in performing business which include organizational structure, operating manual and procedures, databases, documents, information systems, networking, research and development capabilities, patents, copyright, trade marks, system and technologies.39 iii) Relational capital ~ the relationship between the organization and the outside environment, which includes alliances, relationship with customers, partners, suppliers, investors, fianchisers, distribution networks, goverament bodies, image and brand, communities, public and environment. In this study a “bigger picture’ and a holistic understanding of intellectual capital is suggested by proposing to include “Spiritual Capital’ as an additional component of intellectual capital. With this proposal, deficiencies in the current definitions where the absent of another aspect of intangible assets such as vision, culture, values, trust, honor, motivation, benevolence, relationship, team spirit and others will significantly improve the definitions of intellectual capital. This new definition will comprehensively cover all components of intangible assets. This, thinking is in line with many other studies before related to corporate culture, organizational values and the achievement of a better organization’s sustainable performance shown by many world-class organizations who adhere and practiced the spiritual capital principle. The importance of the linkage between intellectual capital and knowledge management also been studied, in developing the proposed definitionCHAPTER 3 THE DEVELOPMENT OF A NEW MODEL OF INTELLECTUAL CAPITAL BY INCLUDING THE SPIRITUAL CAPITAL Spiritual capital is the least defined of the intellectual capital components and usually reserved for defining elements that we do not know how to otherwise identify with one of the other elements. It discusses the essence of a high-performing, high level communicating culture. The idea is to capture the essence or positive spirit of the organization and harness this essence in developing intellectual capital (Hall, 1998). The development of a new model of intellectual capital by including the spiritual capital is timely and valid due to the deficiencies of the contemporary definitions of intellectual capital — human capital, structural capital and relational capital as discussed in Chapter 2. With the inclusion of the spiritual capital dimensions in the definition, it will result in a comprehensive and holistic meaning of intellectual capital. 3.41 Metaphor Of Spiritual Capital This study would enhance the metaphor used by Edvinson and Malone (1998) and Grafstrom and Edvinson (1999) in Figure 2.1 to explain the meaning of intellectual capital, by arguing that the existence of the tree has actually broader meaning and purpose, more than just to produce the ripe finits. The tree will grow and flourish healthily to produce the ripe fruits and to attain its purpose of existence only if it receives and absorbs enough rainfall from the sky and light from the sun in a healthy natural environment. The tree lives in the environment with rules, disciplines and universal laws predetermined by the Creator of the world and receives blessings from above in the form of rain and sunlight to live and prosper. The sun and rain will naturally help the leaves, branches, trunk and roots to receive enough light, nutrients and the necessary minerals for the tree’s output which are carried out by the root, trunk4 and leaves systems. The tree naturally consumes all the resources it is provided with, to produce the maximum output it can produce for the benefits of all forms of life. Man and animals can benefit from the fruits, parts of the tree and the emission in the form of oxygen that benefits all. Above and over all these, the growth of the tree, its inner and external functions follow a set of inscrutable laws and principles. It applies to every tree, everywhere, All these bring to the true broader meaning and purpose of the existence of the tree. 3.2. What is Spiritual Capital? Human beings are made up of the physical self and non-physical or intangible self, such as emotion and mind, which are always referred to as the spirit. The interplay between our spiritual yearning, our emotions, psychological capacity and our capability to learn are all deeply interwoven (Howard, 2002). Man’s inherent design or inner nature seems not only to rest on his anatomy and physiology, but also lies in his most basic needs and the yearn ng and psychological capacity. This inner nature is not obvious and cannot be seen, but is rather hidden (Maslow, 1987). Spirit comes from the word ‘spiritus’ which means breath of life. Spirit is the unseen force that breaths life into us, enlivens us and gives energy to us. Spirit helps to define the true, it’s real and unique self that is “we” and confirms our individuality (Moxley, 2000). In fact, one could say that it is the ‘spirit’ that provides meanings to our existence. Pokora (1997) defines spirituality as “faith in action” or “that, whieh links faith and action”. As mentioned above, for Gardner (1999) spirituality reflects a desire to know about experiences and cosmic entities that are not readily apprehended in a material sense but that nonetheless, seems important to hnman being. Again in Gardner's opinion spiritual refers to everything - mind, body, self, nature, and the supernatural and sometimes, even to nothing. Sass (2000) in his case study on the subject of “characterizing organizational spirituality”, concludes that the “alignment between the values of management and42 members is vital to organizational spirituality”. Dehler and Welsh (1994) write of an ‘alignment’ that “reflects an individual's emotional investment in an organization’s purpose” and that this occurs when “individuals have internalised the organization's values and beliefs” (Dehler & Welsh, 1994: Lee, 1991). Covey (1989) reports that almost all the literature in the first 150 years of the success literature in the United States since 1776 focussed on what could be called the ‘character ethic’ as the foundation of success, such things like integrity, humility, fidelity, temperance, courage, justice and patience. The character ethic teaches that there are basic principles of effective living, and that people can only experience true success and enduring happiness as they learn and integrate these principles into their basic character and live in harmony with them. Principles such as faimess, integrity, honesty, trust and human dignity are not practices or values but principles that are guidelines for human conduct that are proven to have enduring, permanent value. They are fundamental and essentially unarguable because they are self-evident (Covey, 1989, 1992) Sun Tzu the great Chinese warrior and military genius during the Warring States Period more than 2,300 ago in China said (Chung, 1991): “There are five things to consider in the study of warfare. There are the moral cause, nature, situation, leadership and discipline. Moral cause enables the people and government to share a common belief. People can then work with the government through thick and thin, even at the expense of their lives” Krishnakumar and Neck (2002) report that some evidence exists that suggests a link between workplace spirituality and enhanced creativity. Workplace spirituality is also said, in a sense to enhance the personal fulfillment of employees (Burack, 1999), to increase the level of honesty and trust within the organization (Wagner-Marsh and Conely, 1999), and to increase commitment to organizational goals (Delbec, 1999: Leigh, 1997)3.2.1 Spiritual and Intelligence Gardner (1999) defines intelligence as a “bio psychological potential to process information that can be activated in a cultural setting to solve problems or create products that are of value in a culture”. Gardner further explains that intelligences are not things that can be seen or counted, Instead, they are potentiall . presumably, neural ones that will or will not be activated, depending upon the values of a particular culture, the opportunities available in that culture and the personal decisions made by individuals and/or their families, schoolteachers, and others. Gardner further discusses a few more new intelligences such as naturalist intelligence, spiritual intelligence, existential intelligence and moral intelligence. Spirituality reflects a desire to know about experiences and cosmic entities that are not readily apprehended in a material sense but that nonetheless, seems important to human beings. In Gardner's opinion spiritual refers to everything — mind, body, self, nature, and the supematural and sometimes, even to nothing. Existential intelligence is the capacity to locate oneself with respect to the furthest reaches of the cosmos - the infinite and the infinitesimal - and the related capacity to locate oneself with respect to such, existential features of the human condition as the significance of life, the meaning of death, the ultimate fate of the physical and the psychological worlds, and such profound experiences as love of another person or total immersion in a work of art. Moral domain is a concem with those rules, behaviours and attitudes that govern the sanetity of life, in particular the sanctity of human life and in many cases the sanctity of any other living creatures and the world they inhabit. A moral sense entails the capacity to recognize and make judgments about such issues. A key to this concem is a delineation of what is proper or improper, right or wrong or just or unjust with respect to the sanctity of human life or to all forms of life. In conclusion, Gardner is of the opinion that by narrowly defining spiritual intelligence as “existential” intelligence may be admissible, while the more broadly defined “spiritual intelligence” to include those elements this study is now suggesting, is not. Morality is in itself is also not an intelligence but is a statement about personality, individuality, will, character, and in the happiest cases about the highest realisation of the human nature. This is understandable because Gardner is interested44 mainly in the cognitive domain, not what goes on when one intensely feels somethi those that happen in the affective domain Buzan (2001) refers spiritual to ‘non-physical’, life energy including emotions, character, enthusiasm, courage and determination, The spiritual intelligence concems with how the growing, development and protection of nature, these qualities and the soul-moral and emotional identity and the intensity if it’s emotional and intellectual energy. Buzan is of the opinion that, the self-actualisation — the ultimate stage of human development, referred to by Abraham Maslow in his ‘hierarchy of needs’ — is actually what we now call a spiritual intelligence. Tischler, Biberman and McKeage (2002) discuss the positive impacts of emotional intelligence and spirituality to workplace effectiveness and performance. They propose further investigation on the amount of linkages between emotional intelligence and spirituality for the purpose of people development and enhanced suecess in life, with people and society. Emmons (2000), Zohar and Marshall (2001) postulate the notion that spirituality could be intelligence. Emmons (2000) argues that spirituality meets Gardner’s (1993) criteria for intelligence and Zohar and Marshall (2001) propose that “spiritual intelligence” is the highest form of intelligence, among all the intelligences identified. Zohar (2004) defines spiritual intelligence as the intelligence with which we access our deepest meanings, values, purposes and highest motivations. It is our spiritual intelligence, which gives us our innate ability to distinguish right from wrong and for us to exercise our goodness, truthfillness and compassion in our lives, What conclusion can we draw from the above lengthy discussion? (i Spiritual intelligence is actually spiritual capital. How? It falls within the definition of a capital because it is a ‘resource’ that is controllable by an enterprise as a result of past events — the result of recruitment, the result of solutions produced by individuals and teams, or innovations or inventions produced by individual and teams — which can bring inflow of cash or other assets, like patents in the future, (ii) Further, Gardner himself defines intelligence as the capacity ‘to solve problems or create products that are of value to a culture’, Since45 “spiritual intelligence” reflects a desire to know about experience and cosmic entities that...seems important to human beings, then by extension, it can be logically concluded that spiritual intelligence is spiritual capital. It adds meanings and purpose. It focuses on relationship and interrelatedness. It causes individuals with this awareness fo be more calm and balanced in life Zohar (2004) is of the opinion that spiritual intelligence and spiritual capital are crucially linked. Spiritual intelligence’s sense of meaning, values and purpose generates spiritual capital. Gillett (2002) defines spiritual capital as the energy of the human spirit —a spirit that sees and acts from an appreciation that individually we each has a purpose in life beyond just the accumulation of material wealth and collectively our lives are intricately intertwined with others. It is the juice whose power and flow make all the other ingredients come together and work effectively. Zohar (2004) defines spiritual capital as a wealth that we can live by which enriches the deeper aspect of our lives. It is a wealth we gain by drawing upon our deepest meanings, deepest values, most fundamental purposes and highest motivations. It helps to make the future of humanity sustainable, nourishes and sustains the human spirits. It is reflected in what a community or organization exists for, what it aspires to and what it takes responsibility for. 3.2.2 Spiritual, Culture and Religion Religion is an explanation of the ultimate meaning of life, and how to live accordingly, based on some notion of the transcendent (Swidler, 1999), Merriam- Webster Dictionary defines religion as “a cause, principle or system of beliefs held with. ardour and faith” or “a personal set of institutionalized system of religious attitudes, beliefs and practices”. Spiritual is defined as “of relating to sacred matters or concern with religions values or relating to supernatural beings”. Bruce (1996) defines religion as “religion consists of beliefs, actions and institutions which assume the existence of supernatural entities with powers of action, or impersonal powers or processes possessed of moral purpose”. According to John’s Gospel, the Spirit of God, like the wind, “blows where it pleases, you can hear its sound but you cannot tell where it