INTELLECTUAL CAPITAL



Intellectual capital provides a conceptual platform from which to view, analyze, and hopefully quantify the nontangible (but nonetheless extremely valuable) assets of a corporation. Defining the function of intellectual capital is often easier than defining intellectual capital itself. Compounding this difficulty are the ever-changing or expanding definitions of intellectual capital that have been developed in the wake of a 1991 Fortune article by Thomas Stewart. "Every company depends increasingly on knowledge—patents, processes, management skills, technologies, information about customers and suppliers, and old-fashioned experience. Added together this knowledge is intellectual capital," Stewart wrote in his seminal article. Paraphrased definitions of intellectual capital proffered by other writers include: the sum total of the useful knowledge of an organization's employees and customers (Human Resources Glossary); a measurement that equals the product of competence and commitment (Ted Gautschi); sum and synergy of a company's knowledge, experience, relationships, processes, discoveries, innovations, market presence, and community influence (William Miller); gap between the market value and book value of a company's equity (Economist); sum of human capital plus structural capital plus customer capital (Petrochemical Open Software Corporation); and the combined intangible assets that enable a company to function (Annie Brooking).

Although the first usage of the term "intellectual capital" is generally attributed to Hugh McDonald, who worked for a British computer manufacturer, the concept was introduced to the American business community in Stewart's 1991 Fortune article. Between 1991 and 1997 intellectual capital began receiving more and more attention from the business community, the business media, and publishers of business books. In 1997 Stewart's Intellectual Capital: The New Wealth of Organizations was published and went a long way in showing how people, technology, and corporations can be viewed through an intellectual capital perspective. In the book's first chapter Stewart clarifies the extraordinary theory of intellectual capital via a rather mundane object—the aluminum beer can.

By the early 1950s virtually all beer cans were made of steel. Aluminum, although lighter than steel, was more expensive and thus less competitive, because its production required costly amounts of electricity. Aluminum was, however, more malleable than steel. If a very thin but strong aluminum can could be produced, the differential between the amount of aluminum going into the thinner can would offset the high energy cost needed to produce aluminum. By the early 1990s, because of technological advances in the aluminum industry, a beer can weighed .48 of an ounce and was 25 percent lighter than Reynold's first .66-ounce aluminum can produced in 1963. The aluminum can was now cheaper than the steel can. By 1997 aluminum's share of the beer can market had also grown to an amazing 99 percent. Stewart calculated that the new can was 75 percent aluminum and 25 percent knowledge or intellectual capital. This turnaround in the fortunes of the aluminum industry was due to intellectual capital—a nontangible asset. It is important to note that while the aluminum in the new can was virtually unchanged from the aluminum introduced to the public at an international exposition in 1855, it was intellectual capital that led aluminum to decisively dominate the beer can market.

Intellectual capital as a concept is clearly a product of the Information Age and the Information Economy. Stewart again provided examples. The quintessential manufactured product of the Information Age is the computer and the quintessential component of the computer is the microchip. The component parts of a microchip, mostly silicon made from sand, are relatively inexpensive, if not downright cheap. The inherent value and resultant cost of a microchip is, however, a product of the technology or knowledge that goes into its production—the technology needed to turn beach sand into RAM. Stewart also borrowed from Brian Arthur, a Stanford University economist. Arthur put forth the idea of "congealed resources" and "congealed knowledge." Congealed resources are symbolic of the old or pre-information economy. Congealed resources are represented by small amounts of knowledge holding together a lot of material. An ingot of aluminum (a lot of material) is "held together" or produced by a little bit of knowledge—a smelting process that has remained relatively unchanged over the decades. The Information Age introduced the concept of congealed knowledge. Congealed knowledge exemplifies a tremendous amount of knowledge or intellectual capital producing or holding together small amounts of material. A software program is a prime example of Information Age congealed knowledge. The value of a software program lies in the intellectual capital that went into its creation, not the component physical parts of the diskette or hard drive on which it is stored.

Intellectual capital is not to be confused with corporate culture. Whereas corporate culture attempts to answer the question: "Who are we?," intellectual capital, in regards to nontangible assets, attempts to answer the question: "What is our worth?" Just as it is easier to describe the function of intellectual capital than to define it, so is it easier to describe the function of intellectual capital than to quantify it—although many people are trying. How does one quantify such nontangible items as customer goodwill, technological strategies, workplace creativity, and knowledge management? How does one quantify 'brainpower"'?

As reported in the Economist, Leif Edvinsson of Skandia, one of Sweden's largest financial services firms, measured intellectual capital as the difference between the market value of a corporation and the book value of its equity. Edvinsson stated that the balance sheet is an outmoded way of measuring a company's worth. He cited data showing that over the past dozen years or so (and perhaps not coincidentally coinciding with the Information Age) the relationship between share prices and reported equity value has been weakening. To measure worth, Edvinsson said that he starts with a corporation's market value (a good estimate of the corporation's true worth) and then breaks it down into hierarchical categories of assets. Intellectual capital is first categorized as the difference between market value and the "financial capital," or market value, of the corporation's physical assets. Intellectual capital is then further broken down into subcategories such as "human capital" ("the value of its training") and "structural capital" ("the ability to make money out of all these trained people"). Structural capital is further subdivided and value is assigned to such things as customer loyalty, product development, and trademarks. Edvinsson does not assign dollar values to the categories—their value is rather measured in terms of their rank in the hierarchal structure. This method thus allows a way to determine the relative worth of each category of a corporation's assets.

Other methods that include intellectual capital in measuring a corporation's worth are the "balanced scorecard" and Skandia Navigator. The balanced scorecard method was introduced by Robert S. Kaplan and David P. Norton in 1992 in an article in the Harvard Business Review. This method attempts to measure knowledge and worth by scoring four categories:

The Skandia Navigator as described by David J. Skyrme and Debra M. Amidon in Journal of Business Strategy views intellectual capital as the "hidden value of a corporation." The Navigator is similar to the balanced scorecard and provides a taxonomy of five categories: financial, customer, human, process, and renewal.

Intellectual capital provides a new way to measure the worth of a corporation. Under intellectual capital, worth and value are not synonymous. The challenge of intellectual capital is not so much in defining it or understanding its function but rather to quantify it and once quantified to use it effectively.

SEE ALSO : Intangible Assets ; Intellectual Property

[ Michael Knes ]

FURTHER READING:

Brooking, Annie. Intellectual Capital. London: International Thomson Business Press, 1996.

Edvinsson, Leif, and Michael S. Malone. Intellectual Capital: Realizing Your Company's True Value by Finding Its Hidden Brainpower. New York: HarperBusiness, 1997.

Gautschi, Ted. "Develop Your Intellectual Capital." Design News 53, no. 14 (20 July 1998): 170.

Kaplan, Robert S., and David P. Norton. "The Balanced Scorecard: Measures that Drive Performance." Harvard Business Review 70, no. I (January/February 1992): 71-79.

Miller, William. "Building the Ultimate Resource." Management Review, January 1999, 42-45.

Petrotechnical Open Software Corporation. "Intellectual Capital." Petrotechnical Open Software Corporation, 1997. Available from www.posc.org/presentations/km-archer/sldO4l.htm .

Roos, Johan. "Exploring the Concept of Intellectual Capital (IC)." Long Rang Planning: Journal of Strategic Management 31, no. I (February 1998): 150-53.

——. Intellectual Capital: Navigating in the New Business Landscape. New York: New York University Press, 1998.

Skyrme, David J., and Debra M. Amidon. "New Measures of Success." Journal of Business Strategy 19, no. I (January/February 1998): 20-24.

Stewart, Thomas A. "Brainpower: Intellectual Capital Is Becoming Corporate America's Most Valuable Asset and Can Be Its Sharpest Competitive Weapon." Fortune, 3 June 1991, 44 + .

——. Intellectual Capital: The New Wealth of Organizations. New York: Doubleday, 1997.

Tracey, William R. ed. The Human Resources Glossary. Boca Raton, FL: St. Lucie Press, 1998.

"A Viking with a Compass." Economist, 6 June 1998, 64.



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