Value Creation and Business Models: Refocusing the Intellectual Capital Debate
Summary (3 min read)
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.
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Citations
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References
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"Value Creation and Business Models:..." refers background in this paper
...Beginning around the 1980s, and linked to rise of internet, the traditional economic theory of the firm (as developed by Coase, 1937; Jensen & Meckling, 1976; Williamson, 1985 and others) has been challenged....
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"Value Creation and Business Models:..." refers background in this paper
...…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)....
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...Although it is seldom explicitly stated in IC accounting studies, the basis of the IC field is the resource-based view (RBV), a strategic management perspective developed in the 1980s and early 1990s by Wernerfelt (1984) and Barney (1991)....
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...Definitions of the core concept of ‘resource’ are typically all-inclusive of assets, capabilities, processes, etc. (e.g. Barney, 1991), such that it is not possible to identify anything of strategic value that is not a resource....
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...Vivien Beattie a University of Glasgow and Sarah Jane Smith b...
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...Relatedly, Lippman & Rumelt (1992, cited in Teece et al. 1997) argue that certain sources of competitive advantage (i.e. business models) are not fully understood by the company itself, because they are so complex....
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...The competitive disadvantage aspects of disclosure, which are well-understood in the accounting literature (Elliott & Jacobson, 1994), appear in the strategy literature in terms of restricting knowledge flows that would assist imitation by competitors (see Teece et al., 1997, p.526)....
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...Second, the notion of path dependencies (Teece et al., 1997) resonates with the finding of Gibbins et al. (1990) in their seminal qualitative study of external corporate disclosure....
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...11 These assets are typically not recognised in a company balance sheet, precisely because they are not acquired through a market transaction (Teece et al., 1997, note 31). on the ease of replication (i.e. the extent to which productive knowledge can be codified) and the effectiveness of…...
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"Value Creation and Business Models:..." refers background in this paper
...Although it is seldom explicitly stated in IC accounting studies, the basis of the IC field is the resource-based view (RBV), a strategic management perspective developed in the 1980s and early 1990s by Wernerfelt (1984) and Barney (1991)....
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...Vivien Beattie a University of Glasgow and Sarah Jane Smith b...
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Frequently Asked Questions (12)
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.