Growth, above-average earnings, and sustainable competitive advantages are no longer driven by investing in physical assets such as factories, offices, or machinery, but instead by investing in and managing intellectual capital. The success of leading companies such as Amazon, Google, Microsoft, and Wal-Mart is based on their intellectual capital. Physical assets such as distribution warehouse, office buildings, and stores are important, but not as much as (for example) knowledge about customers, technology, and markets. For example, organizations such as Wal-Mart, with its huge store infrastructure, couldn’t perform as well as it does without the intelligence to build its stores at the right locations, the knowledge about consumers to stock the right goods, and its expertise in inventory replenishment. Intellectual capital allows organizations to leverage their tangible resources. Identifying and managing the right intellectual capital is and will increasingly be the key differentiator between successful, mediocre, and failing enterprises.
However before we can identify, measure, manage and report on intellectual capital, we need to understand what we mean by that term. Intellectual capital includes all non-tangible resources that (a) are attributed to an organization and (b) contribute to the delivery of the organization’s value proposition.
To positively impact future value, organizations require a better understanding of intellectual capital and the latest tools available to identify, measure, and manage this important value driver. The guideline outlines five key steps for successfully managing intellectual capital:
- Identifying your intellectual capital
- Mapping the key value drivers
- Measuring intellectual capital
- Managing intellectual capital
- Reporting intellectual capital
The first step is to identify an organization’s intellectual capital. Included in this step is as assessment of its value. Not all intellectual capital is automatically valuable to an organization. It is only valuable if it helps to deliver the organizational objectives. Intellectual capital can be identified through conducting interviews, facilitated workshops, or via mail or online surveys. Once intellectual capital has been identified then its value can be assessed. When valuing intellectual capital it should be kept in mind that the value of intellectual capital depends on an organization’s specific strategy and that intellectual capital dynamically interacts with and depends on other resources.
The next step is to create a value creation map. This visual representation has two primary functions – to ensure that the strategy with all its intellectual capital value drivers is integrated and coherent and to enable easy communication of the strategy and the role and importance of intellectual capital in delivering the strategy.
After identifying and mapping the intellectual capital value drivers, organizations can start measuring them. Many tools and techniques are available to measure intellectual capital. A model using Key Performance Questions and Key Performance Indicators is described in detail in the guideline.
Once intellectual capital is measured, it can then be managed. With relevant assessments, it is possible to understand current performance levels, to know whether intellectual capital has improved or deteriorated and to understand whether any activities and initiatives have affected performance. This information can be used to inform decision making, to test and review strategy and to manage risks associated with intellectual capital.
The final step is to report the intellectual capital. The objective of reporting the intellectual capital is to provide information about the intellectual capital of an organization to its stakeholders. Traditional financial reporting cannot explain the value of intellectual capital. Various initiatives have been created to address the limitations of traditional financial reporting in disclosing information on intellectual capital but no standard has yet been agreed upon. Even so, many organizations have produced voluntary reports and discovered clear benefits, including improved understanding of the strategy by its stakeholders, as well as improved image and reputation.
Success and value creation of any organization in today’s economy is driven by intellectual capital. This MAG introduces guidelines, tools and techniques that can be used to help identify, manage and report on intellectual capital.
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