Value creation efficiency in the new economy

Abstract

Firms, which have recognised the significance of Intellectual Capital as the key resource of modern business, aim at developing ways to manage and also measure this key resource in order to relate their Intellectual Capital performance and bottom line results. But it has become obvious that the traditional financial metrics do not reflect reality because the core of modern business is not cost but instead value creation. Traditional indicators such as revenue, cash flow or income are often misleading and, in our opinion, hinder management's ability to measure more accurately whether or not value is created or destroyed. It has become obvious that, if a firm aims to achieve a maximum result with its existing tangible and intangible resources, management must introduce new tools for monitoring and measuring how well the resources (physical, financial and intellectual capital) have been utilised and whether they create or destroy value. In this context, the ability of employees to transform their knowledge and skills into value creating action is of vital importance. Therefore, intellectual capital has gained in importance as a new knowledge management instrument for managing, measuring and improving a company's intangible assets. It can enable any firm to launch a renewal process and transform itself into a powerful strategic weapon for the new century. Focusing on monitoring and measuring intellectual capital performance, our research shows that Value Creation Efficiency Analysis (powered by the VAICTM model) may be utilised for better measuring business activity at the firm, regional or national level. In whatever follows, after we introduce the concept of Intellectual Capital and its comprising elements, we use Value Creation Efficiency Analysis to study Croatia's banks and the country's entire economy.