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
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Accounting Review, [VOL 45, ISS 4 (2013)] DOI: http://dx.doi.org/10.1016/j.bar.2013.06.001
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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
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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
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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).
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Thus, both the
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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.
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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.