Posts Tagged innovation
I have heard the words “employees are our most valuable asset” many times, but have rarely seen accountants embrace the idea of capitalizing human capital as an asset on the balance sheet. The theory goes that companies expense wages as employees earn them. If employees are an asset I believe the part of workers’ employment cost that adds value to the organization should appear on the balance sheet.
Although accounting rules forbid capitalizing human capital, they only recognize human capital on the income statement. Despite this oversight, many call accounting the language of business. At least one article admitted the problem and recommended alternatives for capitalizing human capital. Chen and Ku (2004) concluded, “The succession of the human intellect over machines and equipment in the contribution to industrial value makes a financial statement that relegates human capital expenditure to expenses inadequate if not obsolete” (p. 129). If accounting is the language of business why is the value of its most valuable asset excluded from the balance sheet?
This disparity leads one to believe companies’ accounting standards look at employees not as an asset, but as a liabilities. For example, in finance the main goal of the firm is to maximize shareholder wealth and accounting rules treat human capital as a period cost (expense) instead of an asset. In recent years many companies have reconsidered the view shareholders are the only stakeholders in a firm, and have expanded stakeholders to include customers, suppliers, and employees. Even with the coming of triple bottom-line reporting I have not seen accounting rule-making bodies espouse the capitalizing human capital (Elkington, 1994; Slaper & Hall, 2011).
Similarly, Reimers-Hild, Fritz, and King (2007) described human capital as a continuous investment leading to increased earning power. Reimers-Hild et al. further described human capital as responsible for innovation, creativity, and keeping pace with change. Chen and Ku (2004) developed a theoretical classification framework that would capitalize certain formation and acquisition costs in early stages of development, learning costs in middle stages of development, and replacement costs in final stages. Chen and Ku argued for disclosing these costs as investments if the costs are unique and add value.
Do you believe employees are your greatest asset? I would like to hear your thoughts. Should your greatest asset show on the balance sheet? Please let leave your comments? Click here if you want to understand more about accounting for human capital.
Chen, H. M., & Ku, J. M. (2004). The role of human capital cost in accounting. Journal of Intellectual Capital, 5(1), 116-130. doi: 10.1108/14691930410512950
Elkington, J. (1994). Towards the sustainable corporation: Win-win-win business strategies for sustainable development. California Management Review, 36(2), 90-100. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9410213932&site=ehost-live
Reimers-Hild, C. I., Fritz, S. M., & King, J. W. (2007). Entrepreneurial Career Development: Using Human Capital, Social Capital, and Distance Education to Achieve Success. Advancing Women in Leadership, 24, 1-N_A.
Slaper, T. F., & Hall, T. J. (2011). The triple bottom line: What is it and how does it work? Indiana Business Review, 86(1), 4-8. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=66506015&site=ehost-live
About 10 years ago the owner of Bimba Manufacturing Company located in Monee, Illinois decided to sell 90% of his stock to employees through an employee stock ownership plan (ESOP). The company produced aluminum cylinders and had two classes of employees. These classes included the managers who made policies and workers who obeyed the policies and performed the work. Under the ESOP instead of workers just obeying the orders of the managers, the company formed cross-functional teams to address problems and improve quality. The teams decided to meet regularly with customers to consider their needs and improve working relations (Jones, 2004).
The ESOP plan changed the workforce orientation improving working relations, accentuating excellence, and leading to a high quality products. Each cross-functional team hired its own workers and socialized together creating a cooperative new culture in the company. Employees effectively relearned their jobs by actively listening and interacting with each other instead of focusing on managers and workers. Managers acted more like advisers and workers gained a more cooperative spirit. Because of this organizational change the company increased sales 70% and the workforce grew 59% (Jones, 2004).
Although when first starting a business an owner can design a hierarchical organization for expedience, the firm stands to improve performance by reconsidering the organizational form. In my experience, hierarchical organizations in a small business can stymie the growth of the organization. I have personally experienced the difference and realized the benefits of redesigning the organizational form.
A more nimble team orientation can improve performance and cross-functional communication. The organization can respond better to the companies’ customers and better address their needs. The case of Bimba Manufacturing offers a good lesson in organizational change designed to improve worker and customer relations.
Have you reconsidered the organizational design in your firm? I would like to hear your ideas about changes that can benefit the organizational design in your firm. If you need help I urge you to act now and we can start to help you. Learn more.
Jones, G. R. (2004). Organizational theory, design, and change (4th ed.). Upper Saddle River, NJ: Prentice Hall.
Companies can achieve superior performance and gain competitive advantage by using the VRINE model emphasizing value, rarity, inimitability, non-substitutability, and exploitability. These five factors influence a firm’s resources and capabilities to compete and achieve superior performance (Carpenter & Sanders, 2009).
First, a resource must add value to meet demand in the market. The ability to compete by itself does not offer an advantage, but can produce a normal profit. The value added assumes the firm can control costs and the product or services offer potential to consumers. Second, scarce (rare) resources can add competitive advantage at least temporarily. Until competitors can normalize this competitive advantage, the firm can achieve above normal profits. Third, if the products or services added are incapable of reproduction by competitors, the firm can achieve a sustainable competitive advantage earning above normal profits for an extended period. These products or services are such that competitors cannot imitate or substitute for them. Last, a firm has to have the capability to exploit the above four characteristics to achieve competitive advantage. The ability to exploiting these resources allows the firm to achieve improved financial performance than if it can only control them (Carpenter & Sanders, 2009).
Small businesses looking to achieve competitive advantage should employ the VRINE model and ask if it can meet these characteristics. The model shows how a firm can sustain superior financial performance by developing resources that meet the VRINE characteristics.
How does your firm do? Does it meet the VRINE model’s characteristics? Learn more.
Carpenter, M., & Sanders, W. G. (2009). Strategic Management: A Dynamic Perspective Concepts and Cases (Second ed.). Upper Saddle River, NJ: Prentice-Hall.
Think about why some companies succeed despite their characterization as risky. For example, one of the most risky businesses people think of is to start a restaurant. The failure rate for restaurants is high, but those that succeed have some special qualities. A good business needs to adapt to what people want.
I am originally from Chicago and I distinctly remember a restaurant chain that became very successful because of its ability to provide what people want. If you have ever heard of Lettuce Entertain You Enterprises, Inc. you may have a good idea what I mean. Richard Melman with Jerry Orzoff started Lettuce Entertain You in 1971 with $17,000. Melman wanted to start an upbeat restaurant directed at young singles interested in rock music, casual clothing, and healthy food. R. J. Grunts became the company’s first eatery in Lincoln Park followed by Fritz That’s It! in Evanston and Great Flying Food Show in 1974. In 1975 Lettuce Entertain you introduced Jonathan Livingston Seafood and Lawrence of Oregano opened in 1976. Lettuce Entertain You mastered the avante garde casual restaurant business with its unique themes (Anonymous, 2012).
A good business needs to anticipate what customers want like Melman did with Lettuce Entertain You. Traditional restaurant startups do not typically think about what will make a restaurant stand out to a certain crowd and will take a more conservative route. A good entrepreneur has an open mind and anticipates providing a service or product customers will want. Lettuce Entertainment did not stop with the off-beat casual idea, but opened more restaurants with more ambience like the Pump Room on Chicago’s Gold Coast and Ambria in partnership with renowned French chef Gabino Sotelino. Later Melman introduced several other themes by opening a series of other restaurants (Anonymous, 2012). My personal favorite is Tucchetti’s.
An open mind is important to becoming a successful entrepreneur. This notion reminds me of a TED talk by psychologist Jonathan Haidt I viewed not too long ago. Haidt explained five key differences between conservatives and liberals (Haidt, 2008). Entrepreneurs with closed minds often do not succeed because they fail to anticipate what consumers want. Lettuce Entertain You showed how new themes can entice people.
Think about your business! Does your business need an attitude adjustment? Lettuce Entertain You provides a good example of how an open mind can open doors for a new business and keep customers happy. If you want to start a new business I urge you to start now to explore how to keep an open mind by working with us. Learn more.
Anonymous. (2012). Lettuce Entertain You Restaurants. Lettuce tell you our history, from http://www.leye.com/about-us/history
Haidt, J. (2008). Jonathan Haidt: The moral roots of liberals and conservatives. Retrieved from http://www.ted.com/talks/jonathan_haidt_on_the_moral_mind.html?quote=339
One of the most important ways for entrepreneurs to learn is to watch others, and what better way than to learn than from watching the pets we love. I have learned so much from my dog, a yellow Labrador retriever, and I want to share some of the tricks I learned from her. Abby is my most loyal and obedient partner and I value the lessons she has taught me. I hope you can learn from what she taught me.
One of the first tasks an entrepreneur needs to learn is how to hunt when hungry. Abby has the distinct ability to sense when she needs a meal. She knows how to hunt and find food to satisfy her appetite. An entrepreneur is hungry often when first starting out and must also find a way to hunt to satisfy the urge to eat. Too often I find entrepreneurs taking hunting for granted mistakenly believing hunting is not an important task, but I find hunting is one of the most basic primal tasks an entrepreneur has. Good entrepreneurs learn to hunt early and often because they need to eat to prolong their existence. Hunt if you want to survive.
Abby also taught me to keep digging. An entrepreneur’s work is never done and to find what one needs one must always keep digging and not let obstacles stand in the way. If a fence or roadblock exists dig under it and find the way to what you need. An entrepreneur never knows what he or she might find, but keep digging and the treasure will come. Dig to find your way.
Another trick I learned from Abby is to keep my sights high. You never know what might drop from the sky. I have seen Abby look at the squirrels on the fence or in the trees and one misstep causes them to drop to the ground in striking distance. I have seen the same result when Abby kept an eye on the birds that did not leave themselves enough room to climb back up and dropped to the ground. Entrepreneurs should keep their sights high as no one knows if something good will drop in their lap. Keep up your head and salvage what drops from the sky.
On a related note, I also learned from Abby to make my presence known. Abby lets me know she is there and if something falls from my grasp she is there to reclaim it. Squatters rights matters! The entrepreneur can also claim something that falls from a competitor or supplier’s grasp and use it to make life better. Claim the prize by making your presence known.
Once Abby claims a prize she also never lets go. Once the squatter’s rights rule takes effect, entrepreneurs need to hold on to what they have gained presuming it has value. If the entrepreneur fails to protect the prize the same can happen to the entrepreneur that happened to the competitor or supplier. Never let go if you want to keep the prize.
Similarly, Abby taught me to keep an eye on the prize. If you have not yet gained the prize this step is most important because once you take your eye off the prize, the more apt you are to lose it. Entrepreneurs need to stay focused and continually look for what they are after. If you want a prize bad enough you have to keep your focus. Never let your eye off the prize.
Once Abby finds a prize, she taught me not to waste anything. Waste violates the survival rule as the entrepreneur should always set aside enough for down times. Squander what you find and do not use as it can come in handy when business is down. Never waste what you have, but keep it for when you fall on hard times.
Another trick I learned from Abby is to have a sixth sense and keep prepared. When someone comes to the door Abby is on her way before anyone knocks or rings the bell. Good entrepreneurs need to prepare for the unknown and have a sixth sense. Anticipation puts you in front of others. So prepare yourself by having a sixth sense and anticipating what is to come.
Abby has another natural knack that I learned that has to do with networking. Abby keeps abreast of the trends and setting by networking with her peers. Entrepreneurs need to scan the environment to find their niche and identify new opportunities. Sniff out opportunities by looking at what peers do!
One other find from Abby’s behavior is to play the game by your own rules. If Abby has the opportunity to define how to play the game she does and lets others play by her terms. Entrepreneurs need to define the rules by which to play the game or risk letting someone else control how they play. Define the rules to benefit how you play and do not rely on someone else to set them for you.
With what I learned from Abby, I have conferred on her the doctor of fine bones degree. I think she has earned her degree and can teach others many good lessons about entrepreneurship. I hope you have found her teachings informative. I continue to learn from Dr. Abby and you can too. I encourage you to act now and learn more.
Often I hear the advice the way to improve products and services is to keep all the costs involved to a minimum. Although keeping costs low is a good way to achieve enough of a margin to make a product or service viable, cost cutting can create other problems. For example, the product or service can have less value to the customer or consumer and cause them to select other more desirable products and services. In short, cutting all costs indiscriminately often is counterproductive.
Just yesterday I listened to a video interview of Steve Jobs and he embraced the idea the main goal is to produce products that customers want and need. Jobs commented that when he came back to Apple when it had experienced financial difficulty many of the corporate managers had a hard time understanding the idea of creating value customers want and need. The approach of Apple corporate managers focused more on cost cutting and less on creating value.
Jobs highlighted the idea that one-size-fits-all approaches do not work as well as more reasoned approaches that consider what customers want and need. Jobs said his philosophy to the turnaround of Apple came from thinking like a small company. Jobs found many good people still existed in the company even after he left. What made these people stay is their belief in the product despite the push by management to cut costs at every chance.
Creative people need space to create value and can substitute parts instead of cutting costs at every opportunity. Jobs explained Apple created the I-pod using substitution instead of cost cutting at every turn. Substitution allows creative people to consider consumers needs and wants instead of putting out a product that has less value to them. Job’s philosophy to work like a small company relies on the communications between company employees and consumers unlike big companies focusing strictly on product margins.
My advice is not to let anyone tell you to leave your brains at the door. Cost cutting is desirable when used correctly, but can also have adverse effects. Think of customers and consumers first before demanding cost cuts. Cost cutting is not an end-all solution. Have you had a frontal lobotomy yet? What does your company tell you?
I want to hear your comments. If you want some other ideas I encourage you to get help now. Learn more.