Rotman Management Fall 2008

BYTHE DAWN OF THE 21STCENTURY, a revolutionary change had taken hold in the realm of value creation: physical and financial assets were no longer the key factors of sustainable competitive advantage. Instead, leading companies like Dell, GE and Procter & Gamble depended on superior human and knowledge assets for their competitive edge. The key advantage conferred by such firm-specific ‘organizational capital’ is the fact that these resources are mainly tacit: they are difficult to codify or directly transfer to other organizations. As the knowledge economy has expanded, so too has our definition of capital, to the point where the most valuable assets of leading innovation-based firms have no actual physical presence, nor a home on a traditional balance sheet. These ‘intangible’ assets – which include reputation, brand equity, sustainability, security and customer…

WHEN WARREN BUFFETT PURCHASED 15 per cent of Salomon Inc. in 1987, his goal was to work his investment magic from his Salomon board seat and help his investment grow and prosper. To his dismay, he found that the firm’s investment bankers were eating up all the potential upside with bonus demands that continued to grow, even when profitability was mod-est or flat. Buffett’s patience was depleted by 1991 when, as chairman, he engineered the removal of $110 million out of the investment bankers’ bonus pool, apparently striking a blow for shareholders. But the victory was short-lived, as it led to a mass exodus of Salomon bankers who sold their services to more pliable firms elsewhere on Wall Street. The incident was indicative of what has become a pervasive conflict between…

You have called ‘organizational capital’ the most important contributor to corporate performance and growth. How do you define it? It is widely observed that within industries or economic sectors, some firms systematically outperform their competitors. Organizational capital is the sum total of all the systems, processes and procedures that these companies use to conduct their business. For example, years ago Wal-Mart was the first to implement a supply-chain management approach whereby, when a customer paid for an item at the cash register, the bar code was read and the information went directly to a supplier like Procter & Gamble, who was then responsible for replenishing the inventory. With this specific process, the largest retailer in the world managed to shift the most expensive function for retailers – inventory and supply-chain management…

WE WOULD LIKE TO PROPOSE A SOMEWHAT RADICAL IDEA: that companies redesign their internal financial performance measurements for the digital age. It is time for organizations to take measure of the real engines of wealth creation in the 21st century: the knowledge, relationships, reputations and other ‘intangibles’ created by talented people. Companies create wealth by converting these raw intangibles into the institutional skills, patents, brands, software, customer bases, intellectual capital, and networks that increase profits per employee and returns on invested capital. Intangibles are true ‘capital’ in the sense that they produce real cash returns. A simple approximation of intangible capital is the market value of a firm less the invested financial capital. Using book capital as a crude proxy for financial capital, the intangible capital of the world’s largest 150…

The Capital Markets Institute’s mandate is to develop a clear understanding of the challenges Canada faces in its quest to become a leader among the world’s small, open markets. What are some of the key challenges we currently face? The first is figuring out how our system should be regulated. There is an ongoing debate between the ‘passport system’ – essentially a free-trade agreement based on mutual recognition of regulatory systems – and the single or ‘national regulator’ approach. Last February, Finance Minister Jim Flaherty appointed an Expert Panel to study this and determine which approach makes more sense for Canada. Its findings will be made public towards the end of 2008. Enforcement is another key issue. There is a perception out there that we don’t enforce as well as some…

MOST PEOPLE WOULD AGREE that teamwork at the senior level of an organization promotes better decision making. At the same time, considerable research and anecdotal evidence suggests that senior teams often find teamwork difficult. The competing viewpoints that promote sound decision making can also lead to conflicts that waste precious time and erode interpersonal relationships. Indeed, when substantial conflicts erupt, dysfunctional group dynamics followed by frustration and flawed decisions may be the rule, rather than the exception. Prior work has advised management teams facing conflict to focus on the substance – the ‘task at hand’ – and to steer clear of relationship issues. Task conflict, it argues, can be resolved by recourse to facts and logic, whereas relationship conflict turns into unproductive personal attacks and emotional confrontations. Task conflict is conceptualized…