Source: The AREOPA Group
What is Intellectual Capital?
Information and knowledge are the thermonuclear competitive weapons of our time. Knowledge is more valuable and more powerful than natural resources, big factories, or fat bankrolls. In industry after industry, success comes to the companies that have the best information or wield it most effectively. Wal-Mart, Microsoft, and Toyota did not become great companies because they are richer than Sears, IBM, and General Motors. But they had something far more valuable than physical or financial assets: they had a strong Intellectual Capital.
A business or government organization not only transmits input into output through a process of knowledge, it also creates or destroys knowledge. Most management research and consultancy services have been focusing on how to increase the input-output ratio, often called efficiency and effectiveness improvement, but have often ignored the explicit value of knowledge processing and knowledge creation within an organization.
The creation of Organizational Knowledge – either privately or publicly owned – refers to the capability of a company as a whole to create new knowledge, disseminate it throughout the organization and embody it in products, services and systems. It is through the specific use of knowledge and continuous innovation that organizations create competitive advantages over other organizations.
Intellectual Capital is considered as the resource that creates invisible or intangible sources of competitive advantages such as networks and organizational systems. The value of any organization is constituted of (1) the physical tangible and financial capital which one finds on the balance sheet of a company and (2) the intangible assets of a company which are usually described as “goodwill” on the balance sheet.
A company’s Intellectual Capital or Knowledge Base is usually determined as the sum of its Human Capital (talent), Structural Capital (intellectual properties, methodologies, software, documents, and other knowledge physical evidence), Customer Capital (client relationships), and Strategic Alliances Capital (alliances, cooperation agreements, exclusivity contracts). These intangible assets or Intellectual Capital are to a high extent related to relationships with the customers and suppliers, and with the employees and partners of the company.
“Good will” does not fully encompass the real value of Intellectual Capital as we understand it. Sometimes Intellectual Capital is interpreted as the difference between the book value – i.e. the historic value of the assets of a company not yet amortized – and the market value -which equals the perceived present value of the future cash flow of a company-.
Intellectual Capital is the sum of everything everybody in a company knows that gives it competitive edge. Unlike the assets with which business people and accountants are familiar (land, factories, equipment, cash), Intellectual Capital is intangible. It is the knowledge of a workforce, the training and intuition of a team. It is the collaboration – the shared learning – between a company and its customers, which forges a bond between them that brings the customers back again and again.
In one sentence: Intellectual Capital is intellectual material – knowledge, information, intellectual property, experience – that can be put to use to create wealth.
The interesting (and useful) thing is to be able to identify these intangibles, make them explicit, document them, store them and make them reusable. And give them a monetary value, which can be reflected in a Balance Sheet.
That will be the subject of another post.
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