Structure of the Model and its Operationalization
In the wake of a highly volatile economy, organizations must find ways to improve their bottom lines and profitability through new and innovative means. Many businesses realize that one of the most important assets that they possess is intellectual capital in the form of intellectual assets and human capital. As businesses struggle to revitalize their assets and assess their value, they are reminded that intellectual capital can provide a wealth of opportunities for growth in a number of ways. The identification of intellectual capital requires a strong sense of work ethic and research skills to identify new knowledge and skills. Once these forms of intellectual assets have been identified, they must be cultivated and managed with efficiency and expertise. Although intellectual capital provides a wealth of opportunities for growth and value in an organization, it is often very difficult to assess its financial value and its effect on an organization’s bottom line.
The following discussion will identify a problem that is very common to the development of intellectual capital, the assessment of its value and its relation to the bottom line. A thorough assessment and evaluation of existing research will be presented to present the opportunities and obstacles involved in intellectual capital realization and cultivation. A discussion of intellectual property and patents will establish the importance of knowledge protection in order to discourage competition, and the encouragement of human capital development will promote the awareness of talent that is present in every organization. Furthermore, the importance of developing an effective knowledge management system will be established. The utilization of employee interviews from various organizations provides evidence that intellectual capital is an appreciated asset. Finally, an analysis of the research and its validity to the problem in question will be presented, and conclusions will be established regarding the problem and its effects on an organization.
1. The Problem
In the current age of information technology, intellectual capital, or IC, has become the most visible and valued asset within an organization. Whether the firm is in the manufacturing sector or in software development, each business guards their research base as carefully as their financial assets. Professional services such as legal advising and consultants charge for their services not because they manufacture a tangible product; rather, they bill for the intellectual knowledge that they convey to their customers. Physical assets are often valued on a lower scale as compared to intellectual capital because experts estimate that an asset cannot enable a firm to explore uncharted territory nor does it provide assistance in decision-making processes. The high valuation of intellectual capital also results from the difficulties encountered in acquiring such knowledge. Furthermore, intellectual capital is a challenging acquisition as it does not behave under ordinary rules or processes. Management of such volatile assets becomes arduous and raises the issue of how to appropriately assess their value so as to not deplete their market value (Stewart 1991).
This research study proposes to identify how the intellectual capital of organizations can be evaluated by identifying the factors that contribute to its high valuation. The research also aims to outline strategies that would allow a firm to integrate knowledge management into its management process in order to enhance its intellectual capital. The primary objective is to shed light on a new management concept in which intellectual capital is integrated as a management tool rather than a mere accounting figure on a typical balance sheet.
2. Scope and Method of Study
The research and findings discussed in this study will demonstrate that the intellectual capital of an organization is enhanced by the implementation of a knowledge management strategy within the firm. Furthermore, it has been established that in today’s volatile economy, intellectual capital is more valuable than ever in the ability of a firm to sustain a competitive advantage. Intellectual capital in any form is worth more than its distinction on a balance sheet, and this study will provide a thorough analysis of existing research from experts in the field of business management.
The researcher will utilize a combination of primary and secondary resources to support the overall framework of the study. Primary sources will include journal articles and books that analyze intellectual capital management. Secondary resources to be considered for the study will include Internet sources, trade magazines, and news items. Expert analyses from management professionals have provided the author with a variety of perspectives and insights into the study of intellectual capital and its influence on management practices. Furthermore, a number of real organizations will be referenced and analyzed in relation to their attitudes and beliefs regarding intellectual capital. Finally, the resulting evidence will demonstrate that intellectual capital is an extremely critical component of an organization’s ability to sustain a competitive advantage in a highly unpredictable economy.
3. Review of Literature
Older management systems did not possess a comprehensive framework that could account for intellectual capital. Any valuation of capital in an intellectual capacity was limited to intellectual property laws for patents, trademarks or goodwill. These items were also not regularly considered in routine business dealings as they were considered company assets and were only measured on end-of-year balance sheets. However, with the recent emergence of the concept of knowledge management, it has become quite difficult for managers to differentiate between intellectual and intangible property. For example, over a decade ago, Thomas Stewart (1991) considered intellectual capital as part of a strategic planning process because it affects the back office operation as in the case of engineers and scientists. However, in today’s work environment, all workers from the top down are also considered a part of intellectual capital and must be accounted for. To resolve this problem, most corporations have turned to automation to reduce the risk of possessing intellectual property. However, this is not the best solution to the problem as corporations utilizing process automation must also focus on skilled workers and the issues related to knowledge management.
Dave Ulrich of Sloan Management Review (1998) has identified the importance of skilled workers that possess a total commitment to the business. Ulrich states that the bottom line for any manager is to pay attention to the intellectual capital as it includes a commitment by managers to worker competencies. Organizations that properly plan and provide policies that emphasize and appreciate capital are likely to experience higher rate of returns. Furthermore, knowledge and skill has developed into an integral part of modern business practices and the implementation of such a strategy has become increasingly important. Ulrich proposed the measurable and useful definition of intellectual capital as competence x commitment (1998).
Traditionally, organizations considered the issue of labor management as part of the field of economics and that human capital is the key resource for production facilities and economic activity. However, as time passed, it has been demonstrated that the key to successful achievement in any organization is located in its human resources pool. Efficacy of management depends on the level of achievement in an organization in terms of its human capacity and community achievements. This can only be accomplished if organizations demonstrate collective community professionalism. The bottom line is that organizations must contemplate the fact that they are highly dependent on community interactions as well as knowledge. However, it must also be noted that knowledge and intellectual capital must be defined according to the nature of its use in the organization before its utility can be gauged. For example, a procedural knowledge and know-how is mandatory and routine while innovative knowledge is considered extraordinary, especially if it is related to the invention of a new product or service (Nahapiet and Goshal 1998).
4. The Process of Centralization
This study will use the following hypothesis to establish its framework in problem analysis and resolution: As organizations become increasingly aware of the importance of intellectual property, they require new management criteria through which they can measure a skilled human resources component, intangible assets, and intellectual property under one centralized management process.
5. Structure of the Model and its Operationalization
More and more businesses are integrating the existence of intellectual capital in the mainstream business process so that they formulate a tool through which they can assess the value of their firms. Since intellectual capital is becoming costly to purchase and integrate into an existing business framework, management processes should possess the ability to account for the use of intellectual capital within a business. Furthermore, organizations are slowly beginning to realize that human resources are its main contributor to the intellectual capital asset pool and therefore, collection, development and conservation of this aspect of the business has become critical.
The principle variables that will be investigated throughout this study include the following key factors:
Human resources as a primary source of intellectual capital
The process of intellectual capital measurement and conservation
Management efficiency in regards to the resource pool
The researcher will adopt the qualitative method of investigation to conduct the research. A series of literature reviews will be performed, and trends and other data regarding intellectual property capitalization will be studied. The data will be analyzed in relation to the context of the study framework and will be utilized to formulate a set of conclusions and recommendations.
II. Analysis and Findings
1. The Survey and Data
The onset of the information age has resulted in the necessity for new accounting practices to accommodate the onset of intellectual capital. Since intellectual capital is an intangible product, new methods of valuation must be identified to estimate its worth to an organization’s bottom line. Furthermore, assets involving knowledge are inherent and therefore, no real transactions take place that require a financial exchange (Stewart 3). In order to accommodate intellectual capital needs, new methods of managing assets must be established. Finally, knowledge must be managed efficiently in order to maximize its value.
In order to evaluate its value and importance within an organization, the term intellectual capital must be defined and a background of its necessity for growth and improvement must be established. In its simplest sense, intellectual capital can be defined as “Knowledge applied to work to create value” (Edvinsson and Malone 3). However, a variety of definitions exist for the term to include such factors as technology leadership, ongoing employee training, and response time to client service calls (Edvinsson et al. 3). Other criteria required to establish the existence of intellectual capital include the following (Carroll and Tansey 297-298):
Legal perspective: Intellectual capital is defined in a legal sense as intellectual property rights for such items as patents, trademarks, and copyrights, also called intangible assets. In relation to the balance sheet, the only item recorded is the registration cost which may be a fraction of the flows generated from reuse and production.
Unrecorded tangibles: Intellectual capital is often defined in terms of employee skills, research and development, internally generated goodwill, brands, licensing opportunities, and innovative use of customer databases and relationships along the supply value chain. Furthermore, individual personalities can also be considered intellectual capital, and these elements are rarely recorded on the company balance sheet.
Accounting perspective of knowledge based assets: Accountants often define intellectual capital as the difference between market value and book value. This often limits the firm in terms of its balance sheet. Therefore, it is unfair to evaluate an organization’s intellectual capital solely in relation to its balance sheet.
A corporate strategy perspective: Intellectual capital is evaluated in terms of four phases of corporate knowledge, including acquisition, accumulation, transformation, and valuation. Strictly speaking, “Intellectual capital is best conceived as the knowledge and creativity available to a firm to implement a business strategy that maximizes stakeholder value” (Carroll et al. 298).
Intellectual capital is also comprised of a combination of two primary elements (Sullivan 133):
Human capital: A company’s individual employees, each with personal skills, knowledge, abilities, and know-how. Each employee possesses implicit knowledge that the business wishes to utilize.
Intellectual assets: If an employee commits knowledge to be defined publicly, it can then be utilized by the firm by any means possible.
Firms can own intellectual assets but not human capital. Therefore, it is in the best interests of business leaders to extract knowledge from their employees and to sustain their loyalty in order to create opportunities for profitability. The Human Capital Index, described in Figure 4, demonstrates the importance of employee retention and growth. A number of evaluation measures are shown in the index. The first measure, the 360-degree assessment, includes the following (Harding Jessup 8):
Senior managers must become the champions of the organization’s knowledge strategy for it to be successful. As such, the senior leaders must share common skill sets to have the capacity to communicate the employee’s individual role in achieving the overall strategy.”
The second measure of the index, Employee Loyalty, provides insight into the important issues that employees face in today’s organizations, including quality of life and retention tactics. “To maintain positive attitudes and employee loyalty, employers must demonstrate that they give back more than weekly monetary compensation” (Harding Jessup 8). The idea is that employees who are content and satisfied with their working conditions will strive for greatness in the workplace and will provide the organization with a wealth of opportunities to develop intellectual capital. The final measure of the index, Years of Experience, discusses the relationship of experience levels to educational achievement. The desired objective is to demonstrate that “employees who earned degrees or other professional recognition as a result of their position stayed with it longer, thereby giving the organization the opportunity to capitalize on the knowledge obtained through the education” (Harding Jessup 9). Employers that offer advanced educational opportunities to employees will have a better chance of retaining those employees and their inherent knowledge that may eventually result in the products of intellectual capital.
With the onset of high technology firms in the late twentieth and twenty-first centuries, it is evident that intellect is replacing traditional manufacturing as the force driving the new economy. According to Carroll and Tansey (298-299),
We have seen a revolution in the worldwide political landscape, the rise of intense international competition, faster product development cycles, and explosive growth in the service sector. Complexity and the pace of change are fueled mostly by knowledge and this has generated strong interest in intellectual capital…the leading global firms are increasingly dependent on the rapid production and distribution of knowledge and the need for single global standards for new technological innovations…a corporation is strategically vulnerable if too few of its employees possess adequate workplace knowledge.”
Today’s economy views employees as a source of revenue generation as they add value through creativity and alternative uses of knowledge (Carroll et al. 300). Therefore, employees are often considered precious commodities if they possess the appropriate mix of knowledge and skill. In terms of intellectual capital, employees are perhaps more important than the bottom line in terms of the endless value that they can provide to an organization.
Traditional accounting measures are designed to provide investors, stakeholders, and customers with pertinent information regarding financial history and stability. In the wake of the increased significance of intellectual property, accounting practices have been harshly evaluated because they do not recognize intellectual property as a tangible asset. It is very difficult to assess the value of IP in conclusive terms since its benefits may continue for an immeasurable period of time. Organizations that solely rely on precise financial results without evaluating the potential rewards of intellectual capital are underestimating their overall worth in a volatile economy. Therefore, it has been recognized in recent years that the measurement of non-financial performance is a critical tool in estimating a firm’s overall valuation. However, this feat cannot be accomplished without extreme effort and a potential overhaul of total business practice as firms are not accustomed to thinking about value in terms of intangibles. A new method of assessment must be established that leverages financial assets against the importance of intellectual capital for an organization. Identifying the value of intellectual capital is the first step to an alteration of business practices as well as in estimating its importance to future cash flows.
All organizations possess some form of intellectual capital, whether it is in the form of human capital or intellectual assets. It requires a strong vision and management structure to evaluate and maximize a firm’s potential in regards to intellectual capital. All firms possess a unique set of characteristics that establish their framework and potential for growth. In the case of intellectual capital, once a strong vision and strategy are established, the purpose of IC can be defined. Typical roles that IC can play include an offensive role to generate new revenue streams, strategic roles to develop new alliances with other firms to gain access to new capabilities, and long-term roles to gain leverage in a competitive marketplace (Sullivan 137). In 2001, a survey identified that only 20% of all firms possess some form of communicated knowledge management strategy (Woods 2). In order to recognize the importance of managing knowledge capital, communication must be improved across all business units:
Sharing is essential, but sometimes difficult to implement, especially in Old Economy environments where the culture of hoarding knowledge dominated and often remains a major obstacle. To overcome it, pockets of knowledge now stored in vertical business units need to be opened and their contents disseminated across the entire organization” (Woods 3).
The Internet and other forms of technology that provide a smooth transmission of information are feasible options for firms to capitalize on the process of information sharing.
Defining the roles that intellectual capital fill within an organization lead to various management opportunities for growth and change. In many businesses, intellectual capital fulfills more than one role, including patent development. This concept is complex in nature as the firm must determine which assets are most valuable and deserve recognition as patents. Furthermore, organizations must establish capabilities to develop qualitative and quantitative estimates of the value of their intellectual assets (Sullivan 139). The next step upon patent recognition of an invention is its commercialization if it is deemed worthy of such efforts by organizational leaders. If this is indeed the case, a number or questions must be answered before this process can be initiated, including the feasibility of extracting value from the invention, the means by which the firm commercializes the invention, and the most feasible conversion mechanisms for the achievement of commercialization. Each of these steps must involve a strategic alliance of all business units to maintain a unified approach. The successful management of intellectual capital is represented by a number of factors, including the following (Sullivan 140):
Competitive assessment: Involves a focus on business and technology competitors in terms of human capital as well as technology
Human capital management: Includes the maximization of human capabilities through the analysis of long-term goals and other factors that permit effective management of human capital within an organization
It is unlikely that if the advent of information technology had not occurred in the twentieth century, intellectual capital would not have been the influential force that it is today. Therefore, it is necessary to provide a discussion of information technology and its importance to the management of intellectual capital.
The world’s economy has been transformed by the availability of information through technological means in recent years. Businesses possess the capability to alter their entire vision and potential for growth through their information systems processes. Furthermore, because information is transmitted electronically, it is virtually possible for an organization of any size to compete in a global market. In the same light, information technology can often lead to new means of intellectual capital, including inventions and patents. Furthermore, the transfer of inherent knowledge into public view can be achieved through information technology. It is critical that organizations evaluate their information needs in terms of their intrinsic capabilities and human capital. The management of human knowledge, including its extraction and conversion into useful means, is absolutely essential to maintain organizational survival, and this knowledge must by some means become influential to the strategic makeup of the organization (Choo 120). Once knowledge has been acknowledged as a strategic asset, organizational leaders must formulate methods to maximize its influence. This can be achieved through the following analysis organized into three stages: (Zack 191):
Identifying relevant assets and skills by observing successes and failures
Selecting those assets and skills which will be relevant to future market needs
Implementing programs which will develop, enhance, and/or protect skills and assets
Once knowledge and skills relevant to the organization have been identified and their importance determined, managers must find ways to protect their value. In the economic sense, knowledge is a highly valuable commodity that requires effective administration. Three primary methods are often utilized to effectively govern knowledge principles. Primarily, the unification of knowledge and assets within a firm promotes new opportunities for growth. Secondly, by replacing market contracts with employment contracts to manage human capital, organizations will have better control over their knowledge assets and employee actions related to their intellectual skills. Finally, firms can reduce employee mobility by altering rewards systems (Zack 203-204). Particularly, employment contracts are becoming more common methods for businesses to capitalize on their employees’ inherent knowledge by requiring them to obey all employer rules and regulations, including rights to knowledge assets. In addition, such contracts often contain employment rules that prohibit discussion of topics related to a firm’s intellectual assets. Finally, some employment contracts may include non-competitive clauses that forbid employees from working for a competing firm for a predetermined amount of time after termination. These examples demonstrate that human capital is increasingly valued as a marketable asset that must be protected at all costs.
The costs associated with the protection of intellectual capital can affect the firm’s cost of doing business and ultimately, its bottom line. Some specific examples include sunk costs, administrative costs, and costs associated with a loss of communication. General accounting principles demonstrate that investment in a firm-specific asset such as intellectual capital is defined as a sunk cost (Zach 209). Furthermore, the cost of retaining employees results in high administrative costs as well as reduced flexibility. Finally, preserving intellectual capital results in a decrease in communication with other organizations. Since this result can be so detrimental to a firm, much of the research focusing on knowledge management and intellectual capital emphasizes the importance of improving communication (Zach 210). In addition, communication always provides the potential to gain access to new knowledge. However, these opportunities also increase the likelihood that firms may be required to reveal valuable knowledge. A balance between access to knowledge and the revelation of intellectual capital to outsiders must be established in order to sustain a competitive advantage.
Although it has not been widely disseminated in recent years, the integration of intellectual capital into a firm’s financial operations is slowly gaining momentum. The following forces demonstrate this assimilation of intellectual capital and financial operations (Edvinsson and Malone 86-87):
The push from inside the company to identify the unknown or unappreciated forces that create value
The pull of company executives, investors, and strategic partners to gain information on strengths and vulnerabilities, and steps being taken to prepare for future activities
The deep pull from past activities to identify factors that estimate success and failure, to learn from past mistakes, to capture and preserve information that may be of company use in the future, and the identification of points of opportunity in a company’s life cycle curve
The deep push to find new perspectives on business practices, new measures of value, and new notions of success
Each of these forces is exemplified in a firm’s profitability. Although accounting firms play a smaller role in their overall financial picture, there are many ways by which they contribute to the financial health of an organization. Accounting now plays four important roles in the development of intellectual capital: Design, standards, certification, and navigation (Edvinsson et al. 169). Design includes the setup of skill systems to manage cost-effective monitoring programs and databases. Standards are critical to monitor the elements that may result in value, to establish benchmarks for improvement, and the implementation of legal regulations for the punishment of violations. Certification establishes a means for conducting audits of intellectual capital, and navigation provides assistance in the search for value creation.
Measuring intellectual capital is a complex task that requires a commitment to defining its value and importance to the organization. Various studies have demonstrated how to leverage intellectual capital to sustain a competitive advantage. Michael Koenig defines the basic components of intellectual capital (113):
The recognition of the importance of information to an organizational unit
The recognition that intellectual capital is useful only to the extent that the organization possesses the structure to maintain and deliver it appropriately
The perception that intellectual capital should be accounted for and reported on in the same way as other forms of capital
Once the recognition of intellectual capital has been realized, a system should be established to capitalize on its potential for organizational growth. Koenig describes such a system, characterized by six steps (113):
Define the role of information and knowledge in the business. In the pharmaceutical industry, the New Drug Application which confirms patents for new drugs is the tool of choice. In the simplest terms, almost all technological skills and expertise that an organization possesses can be considered intellectual capital.
Assess the knowledge assets and strategies of competitors
Assess the internal knowledge portfolio to determine how it is managed and its potential benefits
Evaluate knowledge assets through leveraging potential, assess patents in terms of which ones are outdated and which ones are useful, and determine which assets may have unexamined applications.
Invest and take action by identifying knowledge gaps, and seek ways to license technology before the competitors
Reassemble the knowledge portfolio
The measurement of intellectual capital requires evaluation of the more obvious aspects, such as patents and product development, but additionally, organizational learning can be added to the mix, creating quantifiable measurements, such as the following (Koenig 115):
The amount being spent on professional development activities
Vendor course days attended
Number of in-house presentations made
In-house class and workshop attendance days
Employees pursing higher education opportunities and degrees
Professional meetings and workshops attended
Database searches performed
SDI profiles running
The primary conclusion that Koenig establishes is that leaders must take a considerable interest in the knowledge within the organization before taking action regarding its measurability through identification of the value-added aspect of intellectual capital (Koenig 116).
George Robinson and Brian Kleiner provide a number of methods to measure intellectual capital effectively. Primarily, they define the presence of intellectual capital not on the balance sheet but in the value chain in the following manner (37):
The impact of the less tangible forms of intellectual capital show up, as we have seen, not on the balance sheet but at other points in the value chain. These more intangible forms are called human intellectual capital. This category includes such human skills as know-how, problem solving, decision making, and learning. The firm that has more of these skills or perhaps higher powered versions of these skills, will be highly valued in the marketplace provided the firm can use this capital to create value.” An important example provided by the authors is McKinsey & Co., a high-powered U.S. consulting firm. Like many other consulting firms, McKinsey is composed almost entirely of intellectual capital: “The real strength of McKinsey does not have to come from the strengths of one particular person, but comes from all of the intellectual capital that has been accumulated over years of performing business analyses and proposals” (Robinson et al. 37).
It is widely assumed that intellectual capital is only part of a larger picture for many organizations, but as demonstrated in this example, some firms rely on their intellectual capital as a sole provider for financial results. These types of firms may be one of the most significant models for intellectual capital management.
Perhaps the most difficult area of intellectual capital to measure is technology development. A number of possibilities exist for the measurement of this technology. Some specialists believe that know-how can be measured to the extent that it provides a competitive advantage. Others argue that benchmarking practices in research and development settings are the primary means for measurement (Robinson et al. 38). The identification of parts of an organization that foster creativity is another method by which intellectual capital is evaluated. Finally, the ability of an organization to adapt to a changing market environment provides a measurement of competitive advantage (Robinson et al. 38). Each of these examples demonstrates that organizations possess the power and the capability to foster the growth of their intellectual capital through their own internal resources.
Roos and Roos provide the theory of “hidden assets,” whereby organizations possess intangible assets that cannot be measured effectively because they do not neatly fall onto a balance sheet. They have established five major points in the management of intellectual capital (415):
Intellectual capital is the sum of all of the hidden assets that an organization possesses. This includes the inherent knowledge in the heads of organizational members as well as what is left behind at the firm when the members leave
Intellectual capital is the most important source of sustainable competitive advantage in today’s businesses
Intellectual capital must be managed effectively, a primary objective of organizations
The growth and decline of intellectual capital can be called “intellectual performance” and can be measured systems-based approach to measuring intellectual capital is increasingly important, regardless of the organization’s size, scope, and geographic location
Figure 3 describes the primary forms of intellectual capital in detail. It should be noted that some categories are more important than others, but that each category contributes in some way to the overall intellectual capital picture of an organization.
In today’s society, the identification of intellectual performance is a precursor for the determination of financial performance, and Roos have uncovered ten conclusions regarding intellectual capital (417-423):
Three requirements must be present to develop an intellectual capital system in an organization: 1) the firm must be mature enough to discuss performance beyond financial terms, 2) the firm must have a clearly defined business unit or direction, and 3) a commitment to proceed with such a system must be clear and defined.
The intellectual capital system should be rooted in the company’s mission and vision which is committed to long-term growth of the organization, since intellectual capital should be an outgrowth of strategic development
Intellectual capital measurements must be rooted in the language specific to the business
Intellectual capital must be categorized in order to establish patterns of language that will be essential to the evaluation of intellectual performance
Each category of intellectual capital must be driven by a set of indicators in order to accurately measure results
The balance sheet approach to intellectual capital does not provide information on specific categories. Therefore, a method by which flows between different categories are determined must be established.
There are three ways to derive indicators: Those grounded in the vision expressed, those grounded in the intellectual capital categories selected, and those grounded in inter-capital flows.
Many analytical difficulties exist in handling indicators, including selecting the appropriate indicators amidst a sea of choices, ranking the importance of indicators in specific categories, ensuring a high accuracy of indicators, and establishing the reliability of numerical values for indicators.
A model for intellectual capital must be scaleable and should make sense for all involved parties. This model should eventually lead to an index similar to that of an ROA (Return on Investment).
An intellectual capital system must be aligned with existing business processes to become a valuable intellectual asset in itself.
Roos et al. based their conclusions on their analysis of several companies with intellectual capital systems in progress are already in place, and their assumptions provide a detailed analysis of the importance of a number of factors that must be considered when intellectual capital systems are introduced.
A national organization entitled the American Society for Training & Development established a set of benchmarks for the measurement of intellectual capital in recent years. Their efforts recognize that this concept is one of the most important in the business world today and that their efforts lay the foundation for national acceptance of an established set of indicators. Two primary methods by which intellectual capital measurements are taken have been established (Van Buren 72-73):
Measuring stocks: Simple enumeration of the intellectual capital of an organization in the form of statistical information. A formula developed by Paul Strassman evaluates “knowledge capital” by determining the ratio of “management value-added” to the price of capital. Another popular method is to evaluate the portion of a company’s market value in excess of its book value, also known as the market value of intangible assets.
Measuring effectiveness: This measurement determines the financial again achieved through knowledge management. Another measure evaluates how well intellectual capital stocks are transformed into financial capital, but ROI is not feasible in these measurements.
Figure 5, the Intellectual Capital Management Model, should be read from left to right. The left section, the firm’s existing intellectual capital stocks, integrate into the knowledge management process and enablers. The resulting outputs demonstrate changes in the stocks of intellectual capital and financial performance (Van Buren 75).
This information is based on the core competencies of intellectual capital described in Table 1. From this information, a set of categories was established to identify forms of intellectual capital (Van Buren 76):
Human capital: The knowledge, skills, competencies of organizational members (Some examples include organizational learning, management credibility, employee empowerment, and management experience)
Innovation capital: The ability of an organization to create new products and services through innovative methods (Some examples include R&D productivity, number of copyrights and trademarks, number of new ideas in knowledge management database, and research leadership)
Process capital: Organizational processes, techniques, systems, and tools (Some examples include strategy execution, strategy innovativeness, operating expense ratio, and administrative expense per total revenues)
Customer capital: The value placed on organizational relationships with customers (Some examples include market growth, market share, average customer size in dollars, and marketing effectiveness)
Each of these categories is valued against a set of criteria, including relevance to the overall knowledge management objectives of the firm, the strategic importance to organizational leaders, the availability of data and other information, and the widespread applicability in various businesses (Van Buren 76). Figure 6, the Intellectual Capital Management Matrix, describes a set of knowledge management enablers critical to intellectual capital management (Van Buren 77):
Leadership: The actions and statements of a company’s leaders that establish a commitment to the values of the organization
Structure: The organization of teams and business units within and across an organization
Culture, Behavior, and Communication: Shared beliefs, norms, and values regarding behavior within a business
Technology and Processes: The tools and methods used by a company to carry out business processes
Rewards and Recognition:
simple formula established by Dave Ulrich in Sloan Management Review defines intellectual capital in the following manner: Intellectual capital = competence x commitment (Ulrich 4). Increasing competence is necessary in conjunction with the firm’s business strategy. Furthermore, commitment requires employees to engage the firm with their attention and energy, and this can be a difficult task to accomplish in the wake of competitive pressures and stress. Businesses must find ways to foster commitment in employees and their options include reducing demands, increasing resources, and turning demands into resources (Ulrich 6-13). Demand reduction involves setting priorities in order, establishing a focus, and reengineering through streamlining, automation, and simplifying work (Ulrich 8). Increasing resources involves modifying work schedules, work locations, identifying with a strategy or vision, engaging in challenging work, collaboration and teamwork, and improved communication (Ulrich 9). According to Ulrich (11):
Almost every employee attitude survey about communication suggests that there is not enough information sharing. Even after weeks and months of presentations on strategy, many employees do not always understand it. The fact that communication is difficult, however, does not undermine its importance as a resource…if employees understand why a company is doing something, they will more readily accept it.”
Transforming demands into resources requires involving employees in important decisions, and Ulrich (14) states the following:
Employees who participate fully in decision making – from framing, collecting information, generating alternatives, making recommendations, and implementing and acting on the decision – have an increased sense of control and commitment…intellectual capital comes from employees’ competence and commitment. Both must exist together for intellectual capital to grow. Leaders interested in investing, leveraging, and expanding intellectual capital should raise standards, set high expectations, and demand more of employees. They must also provide resources to help employees meet high demands. Employees will become engaged and flourish, and the organization’s intellectual capital will become its defining asset.”
In other words, although employee demands can be exhaustive, it is necessary that they are aware of the processes involved in developing and maximizing intellectual capital and its importance to the organization. Furthermore, the development of inherent knowledge is likely to flourish if employees are involved in decision making processes that benefit the organization as a whole.
By engaging in these activities, businesses will improve their chances of retaining existing human capital and opportunities for growth.
A firm must establish a strategy to manage its technological assets in addition to its knowledge base. Two types of strategies exist (Zack 252):
Retentive approach: Organizations stockpile their technologies in the hopes that they will be able to withstand threatening opponents
Dynamic approach: Businesses encourage customers, suppliers, and other key players to invest in one part of a firm’s technology which will eventually lead the adoption of new technologies
According to Michael Zack (253):
We can summarize the difference between these two approaches to technology management by saying that the first maximizes the current rents to be extracted from technology assets monopolistically held until the monopoly element has been competed away by market processes, whereas the second focuses on future rents that such assets could generate, rents that might best be secured by cannibalizing existing technologies and transferring their monopolistic potential in a selective fashion to emerging technologies, also under the same firm’s control.”
Organizations that possess various forms of intellectual capital require a means of managing those systems in order to fully realize their benefits to the firm. In many instances, the concept of knowledge management has been introduced to handle the many important characteristics of intellectual capital. In recent years, the United States Department of the Army defined knowledge management in the following manner:
Knowledge management is an integrated, systematic approach to identifying, managing and sharing all of an enterprise’s information assets….Fundamentally, it is about making the collective information and experience of an enterprise available to the individual knowledge worker, who is responsible for using it wisely and for replenishing the stock. This ongoing cycle encourages a learning organization, stimulates collaboration and empowers people to continually enhance the way they perform work” (Woods 3).
Intellectual capital and knowledge management serve very different purposes in an organization, yet they complement one another in a number of ways. The most effective means of managing both systems is to integrate them in such a way to add value. Zhou identifies knowledge management in the following manner (36):
Knowledge management is managing organizational processes to create, store, and reuse organizational knowledge, while on the other hand, developing a knowledge culture to facilitate these processes, with an ultimate aim to create and maximize intellectual capital to make a more intelligent organization.”
According to Zhou and Fink (39):
If competitive intellectual capital is properly utilized and exploited, it becomes the central resource for sustainable competitiveness, success and viability…on the other hand, knowledge management plays an important role in the process of intellectual capital development and exploitation. Knowledge management focuses on facilitating and managing knowledge-related activities and strives to create a knowledge-friendly environment in which intellectual capital will grow.”
Zhou et al. have also formulated a set of strategies that organizations involved in knowledge management initiatives may utilize (43):
Knowledge strategy as business strategy: Focus on knowledge creation, capture, sharing, and use
Intellectual asset management strategy: Specifically focus on patents, technologies, operational and management practices, customer relations, amongst others
Personal knowledge strategy: Focus on personal responsibility for knowledge creation and management
Knowledge creation strategy: Focus on research, organizational learning, and employee development
Knowledge transfer strategy: Focus on systematic approaches for knowledge transfer
Zhou et al. affirm the following (44-45):
supportive organizational structure creates an environment for knowledge generating, and supports collaboration and knowledge sharing. Organizations are suggested to adopt a networked organization structure and become learning organizations. A networked structure supported by modern information technologies encourages open communication and enables members of the network to get access to the right information at the right time for the right purpose. A supportive organizational structure also means establishing a set of roles and positions within the firm, such as chief knowledge officers (CKOs), knowledge project managers and knowledge reporters.” Finally, Zhou (41) has determined that “With the increasing numbers of organizations investing heavily in their knowledge-related activities, knowledge must be managed systematically and methodologically to achieve the greatest effectiveness so as to develop and exploit their intellectual capital for competitive advantages. A lack of a systematic approach for knowledge management will lead to inefficiency and ineffectiveness, and this will hinder organizations to harness the expected benefit from the implementation of their knowledge management initiatives. Hence guidelines must be developed to clarify and address this issue.” These examples demonstrate the importance of the linkages between intellectual capital and knowledge management to organizational growth.
Organizational knowledge should be defined in terms of its importance in the creation of added value and new services. A brief discussion of the types of knowledge available in organizations will demonstrate the significance of defining knowledge in terms of intellectual capital needs. Public knowledge is regarded as knowledge found in textbooks and other research sources. Commonsense knowledge is acquired gradually over a lifetime of experience and is utilized in daily living. Personal knowledge is also acquired through experience but is unique in that it is dependent upon personal interactions with others to be conveyed. Proprietary knowledge is acquired to make sense of certain situations. According to Choo (121):
Personal, proprietary, and commonsense knowledge are particularly relevant to an analysis of the organization’s internal knowledge. Personal knowledge based on personal experience is the basis of organizational knowledge. Proprietary knowledge is knowledge unique to the organization, which the organization has developed in response to its specific circumstances. Commonsense knowledge is shared by members of the organization to establish a sense of identity and meaning.”
Tacit knowledge is required to perform work and is learned through extensive experience and tasks that result in successful completion of the required activities. Each of these types of knowledge requires development in order to facilitate creation of intellectual assets and human capital.
Knowledge can also be defined in terms of its influence on communities. In these settings, knowledge can be used for tangible business purposes and members often bond with a sense of belonging that is based on values and commitment (Botkin 30). A number of these communities often exist within a business and often lead to brainstorming and the development of new knowledge to be used in practice.
Perhaps one of the most important ways to preserve knowledge is to continue to expand the knowledge base through continuous learning. Since knowledge does provide economic benefits for an organization, it is imperative that it is used effectively. It is a widely known adage that “knowledge is power.” However, it not likely that many users know the true meaning of this phrase. In today’s world, the raw materials that are sought after are human thoughts turned into feasible ideas for use. These ideas can act as the most powerful weapons that an organization possesses to achieve growth. However, in order for them to be effective, they must be exchanged with others, where the ideas may be improved or enhanced (Botkin 207). Unfortunately, the concept of open exchange of ideas must be protected by their creators because of competitive pressures from external constituents. If ideas are not fully shared, they are often not fully developed into feasible concepts. A fine line must be established between idea exchange and further development.
As a model for wealth creation, knowledge management involves the sharing of knowledge to create value-added products and services (Chase 83). The concept of knowledge management requires the development of organizational approaches that perform the following tasks (Chase 84):
Enable organizations to operate in new and challenging environments
Help organizations evolve into new management structures
Mobilize, reward and encourage personal development in new ways
Assist organizations in facing new priorities and challenges
In today’s economy, the primary methods by which organizations sustain a competitive advantage is through innovation and new knowledge.
2. Analysis and Findings
The preceding discussion of intellectual capital and knowledge management has resulted in a wealth of information that is best appraised through examples involving real organizations. The following discussion will provide a number of illustrations of companies with operations in the United States who have successfully managed their intellectual capital assets through the development of effective knowledge management systems that have provided information regarding its value. For each of these examples, brief interviews were conducted with representatives from these organizations who possess direct knowledge of their intellectual capital and the management of those assets. To protect the names of the persons interviewed, fictitious names will be used throughout.
Glaxo Wellcome, with operations in Research Triangle Park, North Carolina, experienced a shift in priorities involving intellectual capital subsequent to a highly publicized merger with SmithKline Beecham. The research and development pharmaceutical firm possesses an extensive array of opportunities to acquire intellectual capital and human assets. It is well-known that the pharmaceutical industry is highly competitive and that each and every intellectual asset must be protected at all costs to avoid duplication and infringement on profitability. The United States Food and Drug Administration recognizes the importance of intellectual assets in pharmaceuticals and requires an extended period of time wherby the creator of a pharmaceutical formula is permitted to hold an exclusive patent to the formula for a period of years before it can be communicated to other industry players for duplication in generic formats.
In addition to patent protection, Glaxo responded to its inherent wealth of intellectual assets by facilitating the development of human capital and knowledge. Leslie Boardman, a member of Glaxo Wellcome’s management team, was involved in the development of a senior executive program in the mid 1990s that encouraged the stimulation and creation of knowledge through networking, teamwork, and other programs designed to encourage the development of personal attributes to improve potential. A brief telephone interview based on a set of survey questions provided the author with insights into the importance of intellectual capital and knowledge to the highly research-oriented pharmaceutical industry.
The pharmaceutical conglomerate promotes a total commitment to the organization through knowledge sharing and leadership development while simultaneously encouraging an open corporate culture.
Intel has responded to a changing customer focus in recent years by recognizing its internal assets and intellectual opportunities for growth. Kevin Morgan, a longtime employee and currently a senior manager of the firm, discussed the importance of intellectual capital to the firm in a brief interview with the author. He outlined a number of initiatives that Intel has experienced in its history, including the development of its core product, the Pentium processing chip, created by a team of experts who shared their own inherent knowledge and ideas regarding its development in conjunction with customer needs. The highly competitive information technology industry has affected Intel dramatically financially and otherwise, and the firm is constantly looking for new ways to improve its bottom line. In order to promote intellectual growth and knowledge sharing, Intel believed that the best approach was to develop alliances with other firms to capitalize on the knowledge within the industry. The development of open standards was based on the importance of knowledge sharing and data exchange that have resulted in many successes for Intel in recent years in relation to its Pentium chip. This chip sets the standard for excellence in personal computing in today’s machines.
An interview with John Scanlon, a team leader of a knowledge management effort at British Petroleum shed light on the organization’s initiatives in the area of knowledge management. In the mid 1990s, the firm developed this sector to acknowledge the importance of inherent knowledge and to evaluate the extent of its influence. In order to maximize efforts, BP opened its communication networks to encourage knowledge exchange. As a result, knowledge is gaining momentum in a public arena rather than remaining hidden, providing long-term benefits for the firm. Furthermore, Mr. Scanlon discussed an initiative entitled Virtual Teamwork, which provides ease in communication between internal departments and other organizations. The development of virtual teams is a long-term objective that will promote the influence of modern technologies and knowledge sharing through coaching and mentoring. According to Scanlon, the benefits of virtual teamwork have been realized through team alignment and improved work ethic. This project began a wave of knowledge initiatives that encouraged growth and profitability at BP for which the benefits have been outstanding.
John Thomas, a representative of Novell, discussed the importance of the 1994 merger between Novell and Word Perfect, resulting in a complex union of opposites who performed regular tasks in very different ways. As a result, the new conglomerate joined knowledge banks that required a tremendous effort from all involved parties. The union led to a new strategy that required two forms of management: the traditional hierarchical approach as well as a networking technique. Although intense efforts were made to unify operations, it was discovered that the differences were too great to sustain a competitive advantage against Microsoft. Therefore, Novell sold eventually sold Word Perfect, but it retained a few elements of the operations that were strategically aligned with its current operations. This experience resulted in a number of realities regarding the management of knowledge and assets. In order to sustain a successful operation, it is important that all business units are strategically aligned with the company vision and objectives.
Perhaps one of the most significant examples of the successful integration of intellectual capital and strategy formulation is The Dow Chemical Company. An interview with Joy Chambers, a Dow executive, resulted in a number of revelations regarding Dow’s strategy in relation to their widespread intellectual capital. Before conducting this interview, the author performed research to gain a familiarity with the company history of Dow and its operations, and it was discovered that Dow is a dominant industry player and is considered a benchmark in the development of their intellectual and human capital assets. Dow was founded in 1897 and managed a small product line composed of a few basic chemicals. The firm grew to a global conglomerate with over 2000 products and sales of over $20 billion worldwide. In 1995, Dow owned approximately 25,000 patents and employed 4,000 individuals in the research and development sector alone (Petrash 366). In recent years, Dow positioned its focus to align its intellectual assets with the strategic focus of the organization. Dow began an extensive analysis of its intellectual assets by reviewing the existing patent portfolio, a rather difficult task to accomplish. Once this task was accomplished, a classification of all patents was established into three categories: Those that the business is using, those the business will use, and those that the business will not use (Petrash 367). Further classification resulted in strategy identification in conjunction with valuation and competitive assessment. Figure 1, attached, depicts the complex Dow Intellectual Asset Management Model, in the form of a “knowledge tree.”
Within the Dow framework, over 75 multi-functional teams exist that provide assistance in integrating intellectual asset issues into the business strategy and implement processes that will optimize costs and maximize leverage (Petrash 369). Intellectual asset teams are lead by Intellectual Asset Managers, responsible for sustaining the overall intellectual asset management model within the Dow framework. Their primary responsibilities involve the creation of processes and strategies that contribute to the overall vision of the organization. In order to satisfy their objectives, intellectual asset managers and their teams engage in activities with the Intellectual Asset Management Tech Center (Petrash 369). Figure 2 demonstrates the organizational structure of the Tech Center, which includes the following responsibilities (Petrash 369):
Maintaining an effective communications network: Keeping the lines of communication open and active
Best practice sharing: Providing information on the most effective practices in use in other business units
Continuous improvement of processes: Striving to excel in all areas of business through constant attention to existing processes and improving upon them whenever possible
Database support: Gain assistance from the Information Technology department in establishing database needs
Administrative support: All staff members must fully commit to their responsibilities and assist whenever necessary
Leadership: All managers must coordinate their efforts and provide guidance and encouragement to all employees in their personal endeavors
Career development of Intellectual Asset Managers: In addition to providing support to employees, Intellectual Asset Managers require constant training and encouragement to achieve their objectives
Continuous training and training manual: The development of training programs and manuals for continuous knowledge upgrades and improvement
Measurement: Assessing results in an easily quantifiable fashion
Intellectual Asset Management Tech Center support: Information Technology professionals must be available to assist in the development and improvement of the tech center
Furthermore, intellectual asset managers must adhere to the following minimum standards for improvement (Petrash 369-370):
Develop and maintain an intellectual asset plan aligned with the business strategy: Once intellectual assets have been identified, they must adhere to the defined business strategy in order to maximize efficiency
Review the intellectual asset portfolio on an annual basis: As new technologies, inventions, and knowledge benchmarks transpire, they must be reviewed and evaluated for accuracy and relevance
Identify key intellectual assets: Distinguishing key intellectual assets will provide all business units with a centralized focus and set of objectives
Classify intellectual assets by utilization: Intellectual assets must be categorized according to their relevance and use in the assigned business unit
Manage portfolio costs: The costs of managing a large portfolio of intellectual assets must be controlled and limited in scope
Perform a competitive technology and portfolio assessment: A thorough analysis of existing assets and technology will eliminate duplication and will determine areas that require improvement
Maintain intellectual asset management teams: Coordinating intellectual asset teams based on business unit objectives will foster growth and enhance knowledge opportunities
Encourage leadership and advocacy as well as process implementation for the intellectual asset management vision
Make recommendations for licensing, abandonment, donation, and the utilization of intellectual assets
Ms. Chambers discussed the importance of the 15 major business unit strategies, which drive all functional units of the organization. Every new project must be aligned with the appropriate business strategy and as a result, employees’ personal goals must be aligned as well. This is an ongoing process to which employees must be consistently be committed in order to promote growth of intellectual capital.
An interview with Sharon L. Oriel, a founding member of the intellectual capital team, was conducted by Jay Chatzkel in 2001. Ms. Oriel considers culture as an important aspect of intellectual capital, as stated in the following (46):
We look at culture from a corporate basis, a business basis, an industry basis, a national basis, and since we are global an international basis. We also look at cultural issues on a function basis. We have a very strong R&D culture and a marketing culture, and sometimes those cultures clash. We have had to create an intellectual capital culture that can cross all those other cultures…what is important is building a culture that has a strong linkage between the business strategy and the human element of trust, where both the personal values and the corporate values are involved in creating the financial value. It is complex.”
Ms Oriel’s experience at Dow Chemical has provided her with a number of insights into the process of intellectual capital. She has seen many changes transpire in her tenure and possesses the following view of the future trends of intellectual capital (51):
We can say globally that intellectual property value is clearly increasing. That is a trend that will continue. But I’m going to do a flip on you, because I really question, as we go forward, whether patents will continue to be the trading element for intellectual capital. I believe patents are going to become obsolete. I do not think the patent offices around the world can keep up with patenting…in the future we will also need to find a way to do what I call forward accounting. Standard accounting practices have been around for 500 years and have always produced a historical look. One of our efforts in showing value will be to create some type of forward accounting to show how the intellectual capital of a corporation will impact future earnings and growth.”
Ms. Oriel provides many valuable insights into the potential for intellectual capital growth and development in the Dow Chemical Company. She indicates that the reliance on patents may change in future years and there is an ever-increasing need to redefine accounting rules in terms of their impacts on intellectual capital management, the primary focus of this research study.
Gordon Petrash (372) states the following:
Teaching the corporation what this term [intellectual capital] means and about its components and how understanding them and their relationships to each other could significantly and in a very powerful and positive way, tap into employees, customers, suppliers, competitors, and any sources of knowledge in a way never attained before, to maximize the leverage of existing knowledge and create new valuable knowledge and intellectual assets.” Dow’s commitment to intellectual capital is an ongoing process and the entire team is fully committed to its development and creation.
Finally, the last organization that was analyzed is known as a primary document provider. The Xerox organization is very interested in knowledge and its importance to organizational growth. An interview with Mary Smith, an executive with the organization, unofficially defined Xerox’ mission as “fostering the continuous creation, aggregation, use and, reuse of knowledge, and, to apply it to the pursuit of new business value.” The firm has capitalized on research opportunities by developing a number of research centers across the United States. In addition, Xerox has taken ownership of a number of entrepreneurial companies to expand its scope.
In 1990, Xerox named itself “The Document Company.” Organizational leaders envisioned documents in a number of ways, including a social context in regards to the workplace, where the life cycle of a document involves creating, distributing, storing, and retrieving (Botkin 216). The concept of “communities of practice” has been defined in the context of knowledge organized into various groups which also involves how learning occurs and knowledge is shared. Xerox encourages the concept of “swagger,” whereby knowledge is conveyed through technology and services. According to Dr. Jim Botkin (222), “A core value at Xerox is to recognize the social nature of work and acknowledge that ideas and innovation occur everywhere in an organization. Understanding and respecting where and how people work – communities of practice – allows us to develop tools that harvest, preserve, and facilitate the sharing of knowledge.” By capturing the means by which a document flows within an organization, knowledge flow has also been determined, which is constantly shared with internal constituents and customers.
Each of these case studies identifies organizations that have developed some aspect of intellectual capital and/or knowledge management that are innovative and revolutionary in a knowledge structured society. The concepts introduced and analyzed in the previous section have proven their importance and value in these and other organizations, demonstrating the importance of intellectual capital to maintain a firm’s competitive advantage, value, and growth potential in a precarious economy. The potential for the development of profitable intellectual is unlimited as long as the knowledge and support of management figures exists to foster its growth, and this can be achieved through a number of avenues, including a well-defined management structure and employee development mechanisms to encourage intellectual growth.
3. Discussion of Findings
The research presented in this study was reviewed and evaluated based on the problem of assessing intellectual capital value in an organization. Many experts in the field of business management, strategy development, and organizational behavior were evaluated for their contributions to the discussion of the problem. The research demonstrates that intellectual capital is of primary concern to organizations as they recognize that it is an extremely valuable asset. Unfortunately, it has been established that organizations who favor the financial outcomes defined on typical balance sheets are likely to gain unfavorable results in the area of intellectual capital as it is a measure of success that is not easily quantifiable. Therefore, organizations must find other means of assessing its value beyond purely financial means. A tremendous amount of research has been performed to evaluate intellectual capital as a concept as well as ways to assess its value. Various valuation techniques exist and are commonly utilized, and others are on the horizon. Many studies were thoroughly analyzed and presented in this study that provide a great deal of detail and insight into industry experts’ views and considerations of the subject. Many findings have been presented in this study as a means of explicitly defining the concept of intellectual capital in relation to its potential value within an organization. Many areas of an organization were discussed, including management, employees, and tangible assets in order to determine how the existence of intellectual capital fits into an organizational framework. All of the research presented in the study has contributed in some way to providing a thorough analysis of intellectual capital and its function within an organization. Research studies found in various journals and books have described the types of intellectual capital in detail, from patents and copyrights, to human intellectual capacity. It is evident that each element of intellectual capital requires a thorough analysis and evaluation to determine its value and worth to an organization before it can be discussed in any sort of financial capacity.
A wide array of statistical measures exist that provide estimations of intellectual capital. The Human Capital Index, the Intellectual Capital Management Model, and the Intellectual Capital Management Matrix are just some of the ways that the concept is assessed and valued to improve organizational effectiveness. It can be stated that these measures provide a set of measures that promote the identification of knowledge and intellectual assets. Human assets in the form of inherent knowledge and employee value are also evaluated. It is the responsibility of the organization in question to compile these various measurements and evaluate which method is best suited for their intellectual capital assets. The development of organized knowledge management systems are becoming an increasingly common area of many organizations, and these are designed to identify, evaluate, and promote intellectual assets for organizational growth. The utilization of these measurements provides methods for organizations to develop their own systems based on their specific intellectual capital matrix. For example, some organizations may possess hundreds of patents and licenses but limited numbers of copyrights. The researchers have demonstrated that the decision-making processes involving intellectual capital should be tailored to the specific needs of the organization in question. For this reason, researchers have developed a variety of valuation techniques to promote the cultivation of intellectual capital assets. In all cases, the value of human capital cannot be underestimated and must be considered as a key component of the overall intellectual capital matrix.
This study has demonstrated the widespread importance of intellectual capital in a twenty-first century economy. In many instances, the most valuable assets that organizations possess are their intellectual capital assets, and in these cases, although financial assets are considered important because they can be easily quantified, they are less valuable than knowledge and intellectual assets. As these assets are identified, evaluated, and cultivated, questions will naturally arise regarding their financial value for an organization. Unfortunately, this study has determined that identifying the financial worth of intellectual capital assets may take many years to evaluate. However, their importance to an organization cannot be underestimated. Effective methods for intellectual capital management exist that provide organizations with a variety of opportunities to organize their intellectual capital portfolios in such a way that their potential can be maximized. It is only after these assets have been recognized by all organizational levels that they can be evaluated based on their value. Finally, it is important to note that organizations are likely to reap the benefits of their intellectual capital and human assets in a variety of ways beyond what is printed on a balance sheet, and it is these valuations that will determine the overall direction and growth of an organization.
List of Figures and Tables
Figure 1: The Dow Intellectual Asset Management Model
Figure 2: Intellectual Asset Management Tech Center Organization Structure..49
Figure 3: Detailed categories of intellectual capital
Figure 4: Human Capital Index
Figure 5: An Intellectual Capital Management Model
Figure 6: An Intellectual Capital Management Matrix
Table 1: Core Intellectual Capital Measures
Figure 1: The Dow Intellectual Asset Management Model
Figure 2: The Intellectual Asset Management Tech Center Organization Structure
Figure 3: Detailed categories of intellectual capital
Figure 4: Human Capital Index
Figure 5: An Intellectual Capital Management Model
Figure 6: An Intellectual Capital Management Matrix
Table 1: Core Intellectual Capital Measures
Survey Questionnaire #1
Ms. Leslie Boardman – Glaxo SmithKline
What is your role in the organization?
How are your responsibilities related to the management of intellectual capital?
In the highly competitive pharmaceutical industry, what approaches are necessary to maximize the potential of employees in order to promote intellectual growth?
What specific steps (if any) have been taken to encourage employee commitment and focus?
What sense do you have regarding employee morale and the encouragement of personal development?
Survey Questionnaire #2
Mr. Kevin Morgan – Intel
What is your role in the organization?
How did the strategy to return jobs to the United States back in the 1980s affect the firm’s organizational structure and customer focus?
How has relationship development affected the firm’s bottom line?
How has Intel responded to increased customer demands in a highly volatile economy?
What role does intellectual capital play in the organization’s recent focus?
Survey Questionnaire #3
John Scanlon – British Petroleum
What is your role within the organization?
How has a global organization such as BP developed its intellectual assets to promote growth and profitability?
Are any specific initiatives in place that foster intellectual capital and knowledge?
What is your sense of employee morale and its effects on the intellectual aspects of the organization?
How is BP utilizing technology to promote knowledge expression?
Survey Questionnaire #4
John Thomas – Novell
What is your role within the organization?
How did the merger with Word Perfect in the 1990s influence strategy development and existing business units?
How has knowledge evolved within the organization?
What action has Novell taken to develop human capital?
Survey Questionnaire #5
Joy Chambers – Dow Chemical
What is your role in the organization?
Please describe Dow Chemical’s efforts to capitalize on its intellectual capital assets.
How has employee commitment to new initiatives played a role in intellectual capital development?
How are Dow’s strategic business units aligned to promote growth?
What is the formula that Dow has established to tap into inherent knowledge?
Survey Questionnaire #6
Mary Smith – Xerox
What is your role in the organization?
What action has Xerox taken to develop its existing knowledge base?
What does the term “communities of practice” signify in the Xerox organization?
What does the designation “the document company” mean to Xerox employees?
How is new intellectual capital managed at Xerox?
Botkin, Dr. Jim. Smart Business: How Knowledge Communities can Revolutionize
Your Company. New York: The Free Press, 1999.
Carroll, Ray F., and Tansey, Richard R. “Intellectual capital in the new Internet
Economy.” Journal of Intellectual Capital 1.4 (2000): 296-311.
Chase, Rory L. “Knowledge Management Benchmarks.” Journal of Knowledge
Management 1.1 (1997): 83-92.
Chatzkel, Jay. “A conversation with Sharon L. Oriel of The Dow Chemical Company.”
Journal of Intellectual Capital 2.1 (2001): 42-52.
Choo, Chum Wei. The Knowing Organization: How Organizations Use Information to Construct Meaning, Create Knowledge, and Make Decisions. New York:
Oxford University Press, 1998.
Edvinsson, Leif, and Malone, Michael S. Intellectual Capital: Realizing Your Company’s
True Value by Finding Its Hidden Brainpower. New York: Harper Collins, 1997.
Halal, William E. The Infinite Resource: Creating and Leading the Knowledge Enterprise.
San Fransisco: Jossey-Bass Publishers, 1998.
Harvey, Donald F., and Brown, Donald R. An Experiential Approach to Organization
Development. New Jersey: Prentice-Hall, 1992.
Jessup, Amy Harding. “Intellectual Capital: measuring knowledge assets.” Melcrum
Publishing 5.4 (2002): 8-9.
Koenig, Michael E.D. “Intellectual capital and how to leverage it.” The Bottom Line:
Managing Library Finances 10.3 (1997): 112-118.
Petrash, Gordon. “Dow’s journey to a knowledge value management culture.”
European Management Journal 14.4 (1996): 365-373.
Robinson, George, and Kleiner, Brian H. “How to measure an organization’s intellectual capital. Managerial Auditing Journal 11.8-11.8 (1996): 36-39.
Roos, Goran, and Roos, Johan. “Measuring your company’s intellectual performance.”
Long-Range Planning 30.3 (1997): 413-426.
Stewart, Thomas A. “Accounting gets radical.” Fortune 16 April 2001: 1-10.
Sullivan, Patrick H. “Profiting from intellectual capital.” Journal of Knowledge
Management 3.2 (1999): 132-142.
Ulrich, Dave. “Intellectual capital = competence x commitment.” Sloan Management
Van Buren, Mark E. “A yardstick for knowledge management.” Training & Development
Woods, Bob. “Taking stock of what you know.” The Chief Executive
Zack, Michael H. Knowledge and Strategy. Boston: Butterworth Heineman, 1999.
Zhou, Albert Z., and Fink, Dieter. “The intellectual capital web.” Journal of Intellectual
Capital 4.1 (2003): 34-48.
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