Analysis 1: Evidence and the Nature of Knowledge in the Digital Age

Topic: Intellectual Capital

Topic Number: 4

LEARNING OBJECTIVES

• To describe the development of the concept of intellectual capital from a historic perspective

• To discuss commonalities between different intellectual frameworks as a mixture of human capital, social capital, organisational capital and customer capital

• To outline issues related to the notion of intellectual capital as a narrative

Questions to think about during the session

• If you were asked to articulate your own personal capital in a job interview, how would you go about doing it?

• How would you describe your personal capital?

• How would you place a value on your personal capital?

Questions to think about during the session

• What is ‘intellectual capital’?

• Why do businesses think ‘intellectual

capital’ is important at present?

• How do you develop it?

IS INTELLECTUAL CAPITAL THE MARKET TO BOOK RATIO?

• ‘the difference between the market value of a publicly held company and its official net book value is the value of its intangible assets’ (Svieby, 1997)

• ‘intellectual material – knowledge, information, intellectual property, experience – that can be put to create wealth’ (Stewart, 1997)

• ‘the economic value of two categories of intangible assets of a company: organisational (“structural”) capital and human capital’ (OECD, 1999)

WHY DO WE WANT TO MEASURE INTELLECTUAL CAPITAL?

• To improve management practices?• For external analysts, bankers, brokers,

customers, etc.?• Can we measure the tacit ‘know how’?• Are snapshots meaningful?• Fluctuations in capital markets?• Dangers of benchmarking?

CONCEPTUAL ROOTS OF INTELLECTUAL CAPITAL (Roos et al., 1997)

Figure 3.1 Conceptual roots of intellectual capital (Roos et al. 1997)

HISTORICAL HIGHLIGHTS OF INTELLECTUAL CAPITAL

Table 3.1 History of intellectual capital

HISTORICAL HIGHLIGHTS OF INTELLECTUAL CAPITAL

Table 3.1 History of intellectual capital (Continued)

HOW DO WE MEASURE ORGANISATIONAL PERFORMANCE?

• ROI, ROCE etc.?

• Financial engineering – undervaluation of assets, provisions, capitalization of costs, depreciation, goodwill, brands, off-balance sheet finance?

• EFQM – leading European companies include non-financial indicators

• Balanced Scorecard?

EFQM EXCELLENCE MODEL

Figure 3.2 EFQM excellence model

THE BALANCED SCORECARD (Kaplan and Norton, 1992)

Figure 3.3 The balanced scorecard (from Kaplan and Norton 1992)

HOW DO WE COMPARE IC FRAMEWORKS?

• Is the goal for management to extract value from the organisational ‘know how’ or to create value through developmental and cultural relationships?

• Human capital and social capital are common threads

• Organisational capital

HUMAN AND SOCIAL CAPITAL

• Hamel & Prahalad (1994) – success linked with development and utilisation of core competences

• Human capital – human embodied knowledge

• Social capital – nature of relationships in a cooperative entity

SOCIAL CAPITAL

• Structural dimension showing the linkages and connections between actors such as the density and hierarchy of networks

• Relational dimension that provides the history of interactions between individuals resulting in certain levels of trust, norms and expectations

• Cognitive dimension that leads to shared meanings, interpretations, mental models and alignment of views

ORGANISATIONAL CAPITAL

• Pure form such as organisational structure

• Hybrid form – embodied in individuals through socialisation

• Investments will lead to greater worker productivity?

• Differences between structural, human and organisational capital?

INTELLECTUAL PROPERTY

• Intellectual assets – documents, drawings, software programs, data, inventions and processes

• Intellectual property – claim ownership to patents, copyrights, trademarks and trade secrets

• In knowledge based economy, do we need to manage intellectual property strategically?

PATENTS

• Offer greatest level of protection• Gather revenue from licensing agreements• 1998 – ‘method of doing business’ patents in US• Smart patents – extend the life by using

continuation patents• File patent application at Patent Office –

undergoes few years of ‘examination period’• Normal life 20 years• WTO – Agreement on Trade Related Aspects of

Intellectual Property Rights in 1995

SMART PATENTS

Figure 3.5 Smart patents: using patents and continual patents

COPYRIGHT

• Prevent infringements on copying, distributing, performing or displaying material

• Protect the original works for a longer period of 100 years

• Problems of copyright in the digital age and the potential need for encryption

KODAK – POLAROID

• 1975 – Kodak ignored vast patent barriers Polaroid had erected in the high growth instant camera market

• Kodak was found to have infringed Polaroid’s patents

• Ordered to pay $925 million in damages • Shut down its manufacturing plant • Retrieve the 16 million cameras sold

FINANCIAL REPORTING OF IC?

• Use notion of fair value• FASB (1999): ‘an estimate of the price an entity would have

realized if it had sold an asset or paid if it had been relieved of a liability on the reporting date in an arm’s-length exchange motivated by normal business conditions’

• EU (2000): 1. A market value, for those items for which a reliable market can readily be identified. Where a market value is not readily identifiable for an item but can be identified for its components, the market value of that item may be derived from that of its components; or2. The value resulting from establishing valuation models and techniques, for those items for which a reliable market cannot be readily identified. Such valuation models and techniques should ensure a reasonable approximation of the market value

INTELLECTUAL CAPITAL AS A NARRATIVE

• Found knowledge as a narrative was most useful when centred around ‘value-to-a-user’

• Needs to highlight ‘positive’ aspects as well as problems and pitfalls for it to succeed

• Provides real life examples of trials and tribulations

• Reliability of narrative?

Mouritsen et al. (2002)

Figure 3.6 Example illustrating framework for key components of an intellectualcapital statement (adapted from Mouritsen et al. 2002)

KNOWLEDGE AUDIT – VALUE-BASED PERSPECTIVE (Truch, 2001)

Figure 3.7 Process of knowledge auditing (adapted from Truch 2001)

Reading and preparatory work to be done

Read:• Jashapara, A. (2011) “ Knowledge Management:

An Integrated Approach” Pearson Education, Chapter 3

Work to be done before the seminar:• Carry out all the reading above• Answer the questions on the handout• Bring your work to the seminar

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Essential work for next week

• Please consult the OLE for details of:– Essential readings*– Seminar/workshop preparation work*– Recommended further readings– Any additional learning

* Essential readings and preparation work must always be completed in time for the next session

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End of presentation

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