Value Creation and Business Models: Refocusing the Intellectual Capital Debate

TL;DR: In this paper, the authors identify and discuss the key features of these literature strands and their linkage to contemporary debates on narrative reporting and conclude that the business model concept offers a powerful overarching concept within which to refocus the IC debate.

Abstract: There is currently significant debate worldwide regarding business reporting. The concept of the ‘business model’ has entered into the discourse, as has the concept of ‘integrated reporting’, adding to the established debate regarding accounting for intangible assets and, more generally, intellectual capital (IC). Despite the tradition of extensive interdisciplinary borrowing in accounting, relevant literatures on business models and on modern managerial perspectives on competitive advantage have, to date, largely been ignored within the accounting literature. The main contribution of this conceptual paper is to identify and discuss the key features of these literature strands and their linkage to contemporary debates on narrative reporting. These conceptual linkages between IC, value creation and business models are illustrated by means of interview evidence from eleven company cases. It is concluded that the business model concept offers a powerful overarching concept within which to refocus the IC debate. The concept is holistic, multi-level, boundary-spanning and dynamic. The analysis supports the current calls for integrated disclosure around the central business model story. Suggestions for future research are offered.

Summary

1. Introduction

• Narrative reporting is now firmly established in the IASB Framework for the Preparation and Presentation of Financial Statements as a crucial complement to the financial statements in the annual report (IASB, 2001, §13) .
• The present paper addresses the latter of these proposals.
• Intellectual capital, a form of capital of growing importance, refers to intangible resources which create company value (Ashton 2005 ) by giving the company a competitive edge (Edvinsson & Malone, 1997; Stewart, 1997) .
• These conceptual linkages between IC, value creation and business models are illustrated by means of interview evidence from eleven illustrative case studies.

2. Management perspectives on IC, value creation and business models

• Strategic management and business model literatures are set out, revealing their interconnectedness.
• These models originated in the management discipline as they were developed primarily to support the management of IC.
• In a recent review and critique of this influential perspective, it is concluded that one of the RBV's main weaknesses lies in the narrow conceptualization of a firm's competitive advantage' (Kraaijenbrink, Spender & Groen, 2010, p.349) .
• Barreto (2010) notes the many overlapping definitions of the dynamic capabilities concept and, based on his review of research into dynamic capabilities, suggests that 'a dynamic capability is the firm's potential to systematically solve problems, formed by its propensity to sense opportunities and threats, to make timely and marketoriented decisions, and to change its resource base' (p.271).
• Resources, competencies, value (creation and delivery), Beyond this, business models are viewed as serving the function of 'model organisms' (as in biology) to be investigated in order to understand how they work and 'recipes' which demonstrate how to do something, also known as Common terms used are.

3. Accounting literature on IC, value creation and business models

• The financial statements are the accountant's traditional tool for reporting information relevant to company valuation.
• 13 Measurement issues in financial reporting statements are addressed in the ICAEW's (2010) report on business models in accounting, which focusses on the economic theory of the firm.
• Eccles & Krzus (2010) refer to this as 'one report: integrated reporting for a sustainable strategy', thereby demonstrating the sustainability agenda origins of this initiative.

4. Discussion with illustrative case studies

• This section of the paper draws together key features of the literatures on IC, value creation and business models from the management and accounting disciplines.
• The objective is to demonstrate that, while terminologies may vary, there are several points of tangency in the concepts used and parallels in the logical reasoning about the relationships between key concepts.
• Once this is recognised explicitly, the management literature, which is more developed in these areas than the accounting literature, can be mobilised by accounting researchers to move forward the IC research front and inform the debate on business reporting.
• Interviewees were not explicitly asked about business models, or about change.

4.1 Limited intersection of management and accounting literatures

• Very few of the IC studies published in accounting journals make explicit reference to any managerial view of competitive advantage.
• There are several studies that make the link between IC and the RBV (e.g. Marr, Schiuma & Neely, 2004; Kristandl & Bontis, 2007) , but these are published in the management literature or in specialist IC journals.
• It is also notable that IC studies published in the accounting literature (and in the general management literature) do not make any significant use of the business model concept.
• Pöyhönen & Smedlund (2004) make this link in a specialist IC journal, however the paper has not been highly cited.
• Bukh's resolution, by revealing that corporate executives do view IC as part of a holistic business model concept, even if they seldom use the term 'business model'.

4.2 Business models, commonalities and asset inimitability

• It was shown in Section 2 that the business model concept has successfully colonised the strategic management literature, acting as a holistic, overarching concept.
• As a holistic concept, the 'connectivity' between the various elements (i.e. the glue) is part of the model itself.
• Firms that address the same customer need (even with similar product market strategies) can have very different business models (Zott & Amir, 2008) By contrast, Eisenhardt & Martin (2000) identify significant commonalities in relation to the dynamic capabilities of a business model in low and moderate velocity markets.
• When asked in the interviews about what IC meant to the company and its role in value creation, most interviewees offered a description about the company's crucial principal form of IC and how this was used to deliver a value proposition to the customer that resulted in sustained competitive advantage (Barney, 1991; Kraaijenbrink et al., 2010) .
• "[What makes their company unique] is the people, and it's their reputation and their skill…the authors are quite quick to put out new products, to put them together and then bring them to the market." [ [CFO 8, AIM, Financial services, 76-100%, Human capital].

4.3 Boundaries, partnering and strategic networks

• Management researchers have noted that, frequently, value is no longer created by firms acting autonomously, but by firms acting in conjunction with parties external to the legal entity.
• In circumstances of this type, the boundaries of the business model extend beyond the boundaries of the firm (Zott et al., 2011) .
• Boundary-spanning partnering such as this allows both parties to share resources, costs and risks and/or serves to develop dynamic competitive capabilities and mitigate environmental dynamism by fostering dynamic learning mechanisms (Yaprak, 2011; Li et al., 2013) .
• Both are implicitly referring to the potential of partnering in maintaining dynamic competitive capabilities.
• It is interesting that the draft outline integrated reporting framework states that the full framework will consider reporting boundaries and what information beyond the core reporting boundary should be included (IIRC, 2012b, p.7).

4.4 Changedynamic and evolutionary aspects

• The business model can be used in static sense or in a dynamic sense, as business models change due to internal and external factors, related to markets, technologies and institutions.
• Dynamic business model descriptions capture this process of change (Demil & Lecocq, 2010) .
• Since the interviewees were not specifically asked about change aspects related to IC and value creation, it is unsurprising that only a few mentioned such aspects (Teece et al., 2007) Two companies in particular described very clearly the process of sensing and surveillance so critical to successful change in the business model (Barreto, 2010) .
• The terms used were 'awareness', 'adaptation' and 'seeing things' in a timely manner: ".

4.5 Points of tangency

• The interview evidence in sub-sections 4.2 to 4.4 was used to illustrate the conceptual similarities between the IC literature and the managerial strategic management literature (especially the business model literature, which draws upon the RBV and dynamic capabilities literature).
• External disclosure is one small component of the company's entire set of routines and processes and can serve a strategic role in its own right.
• Using a case company, Nielsen & Bukh (2011) of the term 'business model', concluding that 'the peculiarities of strategy and competitive strengths mobilised by the analysts in their understanding of the case company can be seen as elements of a business model'.
• No load-bearing wall can be omitted without jeopardising the integrity of the whole structure; non-load bearing walls may be removed without any such compromise.

Full text

Beattie V & Smith SJ (2013) Value Creation and Business
Models: Refocusing the Intellectual Capital Debate, British
Accounting Review, 45 (4), pp. 243-254..
This is the peer reviewed version of this article
NOTICE: this is the author’s version of a work that was accepted for publication British Accounting Review
resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and
other quality control mechanisms may not be reflected in this document. Changes may have been made to this
work since it was submitted for publication. A definitive version was subsequently published in British
Accounting Review, [VOL 45, ISS 4 (2013)] DOI: http://dx.doi.org/10.1016/j.bar.2013.06.001

1
Value Creation and Business Models:
Refocusing the Intellectual Capital Debate
Vivien Beattie
a
University of Glasgow
and
Sarah Jane Smith
b
University of Stirling
Accepted for publication in British Accounting Review, 2013
a
Vivien Beattie (corresponding author)
Professor of Accounting
Adam Smith Business School, Accounting and Finance,
University of Glasgow
West Quadrangle, Main Building
University Avenue
Glasgow G12 8QQ
Tel. +44(0)141 330 6855
Email Vivien.Beattie@glasgow.ac.uk
b
Sarah Jane Smith (formerly Thomson)
Senior Lecturer in Accounting
Division of Accounting and Finance
University of Stirling
Stirling
FK9 4LA
Tel. +44(0)1786 467299
Email sarah.smith@stir.ac.uk

2
Value Creation and Business Models: Refocusing the Intellectual Capital Debate
ABSTRACT
There is currently significant debate worldwide regarding business reporting. The
concept of the ‘business model’ has entered into the discourse, as has the concept of
‘integrated reporting’, adding to the established debate regarding accounting for
intangible assets and, more generally, intellectual capital (IC). Despite the tradition of
extensive interdisciplinary borrowing in accounting, relevant literatures on business
models and on modern managerial perspectives on competitive advantage have, to
date, largely been ignored within the accounting literature. The main contribution of
this conceptual paper is to identify and discuss the key features of these literature
strands and their linkage to contemporary debates on narrative reporting. These
conceptual linkages between IC, value creation and business models are illustrated by
means of interview evidence from eleven company cases. It is concluded that the
business model concept offers a powerful overarching concept within which to
refocus the IC debate. The concept is holistic, multi-level, boundary-spanning and
dynamic. The analysis supports the current calls for integrated disclosure around the
central business model story. Suggestions for future research are offered.
Keywords: business model; business reporting; dynamic capabilities; integrated
reporting; intellectual capital; narrative reporting; story; value creation

1
Value Creation and Business Models: Refocusing the Intellectual Capital Debate
1. Introduction
Narrative reporting is now firmly established in the IASB Framework for the
Preparation and Presentation of Financial Statements as a crucial complement to the
financial statements in the annual report (IASB, 2001, §13). In the aftermath of the
financial crisis, there is significant debate in the UK, Europe and worldwide regarding
how best to develop and regulate narrative reporting in the future (e.g. BIS, 2011;
FRC, 2011; EFRAG, 2010; FASB, 2009). This debate comprises two related issues.
First, there is concern that annual reports are becoming too long and complicated,
such that key messages are being lost ‘in a sea of detail and regulatory disclosures’
(Treasury Committee, 2009, §221). The UK regulator has issued proposals for cutting
clutter from the annual report (FRC, 2011), by eliminating immaterial and
unimportant disclosures. This represents a bottom up approach. Second, a top-down,
integrated approach is being proposed in the form of a call from various quarters for
business models to be explained in the annual report (ASB, 2009; BIS, 2011; IIRC,
2011). The present paper addresses the latter of these proposals.
A business model articulates how the company will convert resources and capabilities
into economic value (Teece, 2010). This model makes visible how the company
acquires and uses different forms of capital (physical, financial and intellectual) to
create value. The implicit view underpinning the top-down approach to business
reporting reform is that an organisation’s business model is central to an integrated
reporting framework and that a clear articulation of this model can assist in the
identification of unnecessary detailed disclosures.
Intellectual capital, a form of capital of growing importance, refers to intangible
resources which create company value (Ashton 2005) by giving the company a
competitive edge (Edvinsson & Malone, 1997; Stewart, 1997).
1
Thus, both the
1
Although the boundary around the IC construct is not clear (Mouritsen, 2003), IC is generally
recognised to comprise three main categories: human capital, structural capital and relational capital
(Meritum, 2002, p. 63), with each category comprising multiple lower-level components (see Beattie &
Thomson, 2004). Human capital is the knowledge, skills, experiences, and abilities of people.
Structural capital comprises organisational routines, procedures, systems, cultures and databases.
Finally, relational capital is the resources linked to the external relationships with, for example,
customers, suppliers, or R&D partners.

2
intellectual capital concept and the business model concept concern the
transformation of resources (capital) into value. While physical capital and financial
capital are currently recognised in the financial statements, few categories of
intellectual capital are recognised. Yet intellectual capital is documented as the most
important type of capital (World Bank, 2006; OECD, 2006) in the knowledge
economy and economies dominated by service industries. This has led to concerns
that financial statements have become less value-relevant with companies being mis-
valued (Lev & Zarowin, 1999; Zéghal & Maaloul, 2011). As an alternative to
recognition, some intellectual capital components may be mentioned within the
narrative sections of the annual report. The presence of intellectual capital is,
however, not a sufficient condition for the creation of value. The intellectual resources
must be used (often in combination with other, tangible assets), to engage in value-
creating activities. Thus narrative intellectual capital reporting frameworks, such as
that proposed by the Japanese government (METI, 2005), call for not only the
description of intangible resources, but also the associated capabilities and the nature
of the competitive advantage which using these resources gives.
Since 2010, the UK Corporate Governance Code, which is mandatory for listed
companies under Stock Exchange rules, requires directors to include an explanation of
their business model in the annual report (FRC, 2010). While the mandatory Business
Review includes no specific requirements in relation to business models and
intellectual capital (Companies Act, 2006), the non-mandatory IFRS Management
Commentary Practice Statement (IASB, 2010) calls for discussion of intellectual
capital. The non-mandatory UK narrative Reporting Statement (ASB, 2006), which
retains a legacy influence, also encourages discussion of resources such as intellectual
capital. Recently, the BIS Consultation Document (2011) has proposed that this
Reporting Statement be revised to replace the current Business Review and Directors’
Report with a high-level Strategic Report and an Annual Directors’ Statement. The
government response, following an analysis of responses, is to proceed with this, to
‘allow companies to tell an integrated story in their own words, starting with their
business model and strategy’ (BIS, 2012, p.4). Thus, listed companies face a mixture
of mandatory and best practice guidance at national and supra-national level in
relation to reporting on the intertwined concepts of intellectual capital and the
business model.

Frequently asked questions

Q1. What are the contributions in "Value creation and business models: refocusing the intellectual capital debate" ?

The concept of the ‘ business model ’ has entered into the discourse, as has the concept of ‘ integrated reporting ’, adding to the established debate regarding accounting for intangible assets and, more generally, intellectual capital ( IC ). The main contribution of this conceptual paper is to identify and discuss the key features of these literature strands and their linkage to contemporary debates on narrative reporting. Suggestions for future research are offered. 

Q2. What future works have the authors mentioned in the paper "Value creation and business models: refocusing the intellectual capital debate" ?

In terms of future research, much remains to be done. Further research should investigate the extent and nature of reporting of constituent concepts. The authors suggest that empirical research into accounting narratives ( including IC narratives ) that is theoretically-informed by the management literature on strategy and business models is a fruitful line of inquiry. 

Q3. What is the requirement for directors to include an explanation of their business model in the annual report?

Since 2010, the UK Corporate Governance Code, which is mandatory for listed companies under Stock Exchange rules, requires directors to include an explanation of their business model in the annual report (FRC, 2010). 

Q4. What are the pre-requisites for assets to be recognised on the balance sheet?

the pre-requisites for assets to be recognised on the balance sheet are that (i) it is probable that expected future economic benefits attributable to the asset will flow to the entity and (ii) the cost of the asset can be measured reliably. 

Q5. What is the relevant factor for determining the cost of assets?

it is concluded that historic cost is likely to be most relevant for assets intended for use or creation within the firm, while market prices (fair value) are likely to be most relevant for assets intended for exchange in the market. 

Q6. What is the implicit view underpinning the top-down approach to business reporting reform?

The implicit view underpinning the top-down approach to business reporting reform is that an organisation’s business model is central to an integrated reporting framework and that a clear articulation of this model can assist in the identification of unnecessary detailed disclosures. 

Q7. What is the role of non-financial reporting in the business reporting package?

Non-financial reporting 15 plays a key role in such models, seeking to overcome the limitations of the traditional reporting model, especially in relation to intangibles (p.37). 

Q8. Why did the IC report become part of the narrative reporting debate?

Not surprisingly, due to the stringent criteria for balance sheet recognition, the external reporting of IC became part of this narrative reporting debate. 

Q9. What is the key element to be discussed in the financial statements?

The non-mandatory Management Commentary Practice Statement issued by the IASB (2010, § 30) identifies ‘human and intellectual capital resources’ as among the key elements to be discussed in order to provide a context for the financial statements. 

Q10. What is the robust finding in the accounting literature concerning analyst and investor needs?

one of the most robust findings in the accounting literature concerning analyst and investor needs is that these users want, first and foremost, information to help them assess the quality of management, which is a key human capital resource (ICAEW, 2009, p.43). 

Q11. What is the main contribution of this conceptual paper?

The main contribution of this conceptual paper is to identify and discuss the key features of these literature strands and their linkage to contemporary debates on narrative reporting. 

Q12. What is the difference between the initial IC models and frameworks?

The initial IC models and frameworks proposed in the management literature (discussed in section 2) gave way to a more narrative-based (rather than quantitative measure-based) approach to IC reporting in the business reporting package.