Accounting “gets real” in dealing with virtual manufacturing
| Date | 01 September 2005 |
| Pages | 322-338 |
| Published date | 01 September 2005 |
| DOI | https://doi.org/10.1108/14691930510611085 |
| Author | Mike Tayles,Margaret Webster,David Sugden,Andrew Bramley |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Accounting “gets real” in dealing
with virtual manufacturing
Mike Tayles
The Business School, University of Hull, Hull, UK
Margaret Webster and David Sugden
The School of Management, University of Bradford, Bradford, UK
Andrew Bramley
Warwick Business School, Warwick University, Coventry, UK
Abstract
Purpose – Of relatively recent origin is the virtual organisation where companies are able to marshal
the necessary competencies from a range of independent external agents through the strategic use of
outsourcing mechanisms. The paper discusses the challenge of accounting for intellectual capital (IC)
and intangible assets and presents a financial analysis and background of companies exhibiting
different levels of virtuality, from traditional manufacturing to virtual manufacturing.
Design/methodology/approach – This paper is based on the interaction of the researchers with
three companies exa mining their positi ons on the continuum fro m traditional to virt ual
manufacturing. Case studies of the companies and some key financial results for a period of years
are presented in order to explore implications and inform strategic decisions.
Findings – It concludes that conventional financial reporting for IC and intangibles has limited
scope. This is elaborated through contrasts in a number of conventional accounting measures and
some others, less conventional, to highlight the implications of the intellectual capital employed. The
results are reported and implications of these discussed in the context of the companies whose
background and activities are briefly outlined.
Practical implications – The measurement and management of the intangible assets and
intellectual capital of organisations has been the focus of recent research in accounting and finance.
This has applied to the corporate reporting of financial results involving its impact on the balance
sheet, managerial accounting concerned with decisions and the internal use of various financial and
non-financial performance measures and finance where market values of companies have been shown
to differ significantly from their book values as shown in published accounts.
Originality/value – The content will be of interest to academics studying issues surrounding the
reporting and decision making concerning intellectual capital and intangibles. Additionally, managers
and consultants whose companies are engaged in ou tsourcing and or virtual/semi-vi rtual
manufacturing should find the results informative.
Keywords Accounting, Intellectual capital, Intangible assets, Financialreporting, Resources
Paper type Research paper
Introduction
Current international research has brought the issue of accounting for intangible assets
and intellectual capital (IC) into sharp focus. The product of this research sets out the
importance of intangible assets in the generation of sustainable competitive advantage
within the modern organisation. With the growth in the knowledge-based economy, it
is becoming increasingly the case that the intangible assets of the firm and its
“intellectual capital” are the keys to achieving sustainable competitive advantage,
rather than technology or tangible assets alone (Drew, 1999). Features of this “new
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
www.emeraldinsight.com/researchregister www.emeraldinsight.com/1469-1930.htm
JIC
6,3
322
Journal of Intellectual Capital
Vol. 6 No. 3, 2005
pp. 322-338
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930510611085
economy” include increased emphasi s on inter-enterprise collaboration wi thin
networked supply systems. Extending the notion of the networked value chain leads
to the concept of the virtual organisation as the ultimate “new business” form.
Virtuality is a continuum, the extent of “virtuality” of an organisation can be seen as a
measure of how far it has embraced the concept of the networked value chain.
In recognition of the contribution of intangibles to a company’s future performance,
various research has sought not only to find a reliable method of measuring intangible
assets, but also to develop indices that are better predictors of future commercial
potential. These are built upon revised financial computations and metrics. There are
two underlying tenets:
(1) As the economic environment changes and more companies create competitive
advantage through their intellectual capital, the gap between the market
valuation of a company and the numbers assigned to its published financial
statements grows wider, often attributable to intangible assets.
(2) Many of the procedures adopted to account for the effects or value of intangible
assets are entrenched within traditional ”bookkeeping” and are no longer
effective explanation for the impact of these assets on profitability or growth in
the modern company.
The paper consists of seven sections including this introduction. In the next section,
intellectual capital is briefly outlined, followed by the focusing of it relativ e to
knowledge-based companies. In the fourth section, virtual manufacturing is discussed
in the context of intellectual capital and intangible assets. The fifth section deals with
the approaches to valuation of intellectual capital. The case studies are introduced next
with insights into the characteristics of three companies each having different levels of
virtuality. Finally, some conclusions are drawn in relation to intellectual capital and
virtual manufacture.
Intellectual capital
Intellectual capital has been described as the total stock of human, customer and
organisational capital or “knowledge-based equity” that a company possesses
(Stewart, 1997). There have been a number of attempts to categorise intangible
corporate resources. Some suggest that IC is divided into human capital, structural
capital and relational capital. Edvinsson and Malone (1997), Roos et al. (1997) and
Sveiby (1997) all agree that human capital and structural capital are two of the
components of IC. Human capital represents the human resources, the assets that are
not owned by the firms. Structural capital is the processes, procedures of the firm,
internal assets that are created and developed out of the processes and procedures
carried out such as patents, trademarks, and copyrights. The third component of IC,
relational capital, is the good relationships with customers, customer loyalty and
brands as well as the good relationship with suppliers and their reliability, competence
and trustworthiness. This is illustrated in Figure 1.
The knowledge-based company – decision making and reporting
An increase has occurred over recent years in the number of formations of
knowledge-based, technologically-driven companies including those involved in
virtual and semi-virtual manufacturing. For many of these companies it is becoming
Dealing with
virtual
manufacturing
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