Intellectual Capital

Employees are one of a company’s biggest assets. The term intellectual capital define the intangible assets offered to a business by its staff members efforts as well as skills resources, including trademarks, patents, and copyrights. Furthermore, it includes any results originating from human thoughts and innovation. You can divide intellectual capital in the legally acknowledged intangible assets, which include the copyrights and patents, as well as purchased franchises. Trademarks, customer lists, brands, and customer orders are legally salable and protected intangible assets. The third section is structural intangible assets, which compromise all databases and systems employed by the company, including sales, account, information, and purchase systems. The last is the human capital intangible assets, containing the thoughts of the employees of the company.

What is the significance of intellectual capital in a business?

During the last half of the twentieth century, the business nature in the USA underwent modifications drastically. Whereas manufacturing and goods producing markets were dominant in the job market, the second half of the century marked the service providing industry being more noticeable. The economy experienced a shift in how the labor force application changed from manufacturing to service providers. Previously the significant amount of people was allocated to the production segment. However, the employees in the service department now exceed the production sector. Service companies, as well as retail and industrial entities, rely on the perceptive skills of management for development and value generation, with the result being the success of the company. In any company, you will find the individuals with the appropriate knowledge, which signify intellectual capital. In other words, this millennium the drive behind the workforce is brains and not as much physical labor; that is intellectual capital. Another definition of intellectual capital is that it is the difference between the replacing cost of a company’s assets and the market value, consisting of human, structural and customer capital. When managers are capable to manage knowledge effectively, their company will improve their intellectual capital. Education became a crucial source for countries, firms, and people, and with proper management of intellectual capital and knowledge, any company can fashion competitive advantages. Depending on how well a company can create, capture, and leverage its available knowledge, it can experience as increase or decrease in its fortunes and values. Intellectual capital incorporate the strategies, mental methodologies, models and unique approaches, which companies employ to compete, understand, create, replicate and solve problems. Though state earlier that it encompasses intellectual property such as trademarks, copyrights, and patents, it is much more. It is the total sum and interaction of a company’s experience, processes, knowledge, innovations, discoveries, community influences, and market presence.

What is human capital?

It is the skills, knowledge, experience, attitudes, and intuition of the staff members, which can increase by enhancing the capability of each employee. Using their abilities, the employees offer solutions to the consumer. The human capital is the company’s combined capacity to excerpt the best solutions from its workers knowledge. People generate knowledge, develop new ideas, and design new products. They fashion new relationships that ensure the working of processes. The downside is that when an employee leave the employment of a company he takes along the knowledge and relationships he possess. Human capital became a crucial factor for several reasons of which it being an appreciable asset to the enterprise is primarily the most important of all. All property depreciate from the day they are obtained. For a business to prosper its human capital, need to accumulate. The manager has the responsibility to change knowledge to productivity and to transform intellectual capital to customer value. Relationships grounded on competence and commitment of people delivers valuable service.

Individuals with the most intellectual capital have transformed to volunteers, as a staff member with expanded knowledge can most probably find work opportunities as several other firms. It does not implicate that they are working at no expenses to the company. Instead it implies that the employee is free to select where he wants to work, volunteering his services to the particular firm of his choice. These employees commit to their work as they form emotional bonds with the company that employs them. Their interest is in the meaning of their work and not in economic returns. This mindset provides employees the empowerment to leave the employment of one company for another without hindrances. Several managers disregard and devalue intellectual capital. As an outcome of downsizing, less management levels, higher consumer demands, increased competitiveness, and upsurge in obligations, lead to employees not experiencing change for the better in their work environments. The current investments concerning intellectual capital are out of line, instead of realizing the advantages of the potential of the company; managers view it as an unrealistic expense. Learning and education implies the ongoing and always changing foundation of innovation and adaptability.

What is structural capital?

This section involves the wide-ranging prospects of models, patents, administrative and computer systems, and concepts. Staff members are responsible for creating these while they remain the property of the company. The people employed by the corporate together with the internal structure form what we know as the organization. Structural capital is the business’s organizational skill and abilities to meet the requirements of the market. It envelopes the routines and structures in the company, which support the employees mission for maximum intellectual performance, and at the same time the company’s performance. Structural capital consist of four elements. The way a company’s communication, information and decision-making process and outputs including capital and products or services, proceed. The arrangement relating to responsibilities and accountabilities in the company, which define the relationship and position among the company members. The strategy or goals of the business and by what means it plan to achieve them. The last but not the least element is the culture or the total of the people has shared opinions, their collective mindset, as well as the norms and values, found within the company. The association between culture and strategy is more potent than generally presumed. At start up a company’s culture is a powerful filter for its perception of the corporate environment, playing a principal role in shaping the strategies, which the company adopts. At later stages, when explicit policies are in place, the culture has to be able to adjust to these to ensure successful implementation. A business with strong structural capital has an understanding culture that permits the individual to attempt, fail, and endeavor again. A culture, which overly punishes disappointment, will experience limited success.

What is external capital?

It is also known as customer or relational capital, referring to the corporation as a network of associates, and their contentment with, and devotion to the company. It encompasses the knowledge concerning consumer and supplier relationships, market channels, and associations in the industry. Also it comprehends the influences of the government public policies. Managers tend to overlook the wealth of information available to them by tapping into the supply available from suppliers and consumers. To understand what the customer want precisely forms a market leader instead of a follower. Measurable elements in this form of intellectual capital are longevity of relations, satisfaction, supplier and consumer loyalty, and target marketing. The external structure embraces brand names, reputation, trademarks, and external relationships. Consumer capital reflects through customer complaints, cross-selling, renewal rates, and referrals. Contributing elements are wide ranging, including commitment and mutual trust with their main suppliers, and having beneficial and reliable partners. The company’s capacity and status in the surrounding public, while having a comprehensive understanding and knowledge of the relevant laws, plays a vital role as well. The last crucial element is the recognizing the intelligence concerning the competitors and their advancements. You can only manage relationships, not control them. Enhancing external capital require more efficient relationships, building them outside the parameters of the company.

The management of intellectual capital

It is the responsibility of management to optimize intellectual capital. Expanding the growth of a business requires the enhancement of intelligence and development while exercising integrity. The goal is to increase the intellectual capital throughout the company. It is this part where good communication is crucial, in training, and educating workers in particular areas where specialized knowledge is lacking. A regular culture survey provides management with information concerning the mindsets, values, behavior, and results of the training process they have implemented. Two sets of knowledge are associated with intellectual capital, the tacit knowledge, and explicit knowledge. Tacit knowledge is the intellectual creativity and experience, as well as the learning curve with the rest of the employees. Explicit is the knowledge, which can be collected and arranged into information with the possibility to retrieve and circulate systematically. Tacit knowledge is diverse in the various segments of intellectual capital. In human capital, it is the individual’s mindset, the assumptions they make, their biases, beliefs, and values. Customer capital embraces the mutual and different mindsets of the consumer, which form their viewpoint concerning the value they receive in any product or service. In structural capital, it is the shared mindset of the employees, which constitute the culture of the company, including its norms and values. Active collaboration is requisite for knowledge based approaches.

The importance of implementing the intellectual capital process

Employees have extensive knowledge concerning their functions in the company, the processes involved in the business, as well as the expertise about what may work and what may not; making things happen in the most efficient way possible. Moreover, they possess the insight of what systems work, and which should be discarded. One impact of a recession and unemployment results the fact that this knowledge is potentially lost to the company. HR and managers face a primary challenge to acquire and store the data concerning the principal job knowledge, involving all employees, their experience and skill sets. The successful implementation of novel technologies depends on a variety of factors, which management and HR need to overcome through sufficient training and communication. International companies face even higher barriers to negotiate, including diverse languages, time zones, and ethics. As intellectual culture finds its habitat in the brains of the employees, it is vital to get them to share, to reap the benefits from their knowledge.

Inadequacy of GAAP

GAAP is the General Accepted Accounting Principles that establish what should be recorded and reported on a company’s financial statements. These financial reports do not take into account the intangible assets or workforce as countable assets. However, when speaking to a stock market analyst, you will find that they consider these assets essential as it assist in determining the value of the business, including its future profit projections. In certain segments of the market, this information is valuable and crucial when determining the value of the firm. These include pharmaceutical fields and information processing sectors. These markets allow companies to sell at much higher prices as book value, as their employees add value to the business. The argument against GAAP is the issue that it does not allow any provision in the reporting model to record or calculate the measure and value of employee's skills accurately. The technological capabilities, along with the employee skills are important factors in the progress of any company. As the financial information lack the value of the measurement of intellectual capital, the financial information is at times regarded as inadequate and misleading. Several firms in the past reflected accounting profits, grounded on tangible assets, yet the intellectual assets reduce the values of these businesses, as they are not adequately developed at staff level. The consequence is the profits vanishing and closure of the business.

In conclusion, it is sensible to say that the actual worth of a company is only visible below the surface, reflecting through its intellectual capital. The Balanced Performance Management System comprise four key elements, which combined create a dynamic cycle, increasing the market value of the corporate. These factors are human, structural, and external capital, combined with financial performance. Investing in human capital leads to more capable and competent workers, which have the ability to develop an advanced structural capital for the corporation. It contributes to the development of a more proficient external capital, which consequently deliver an improved financial performance. The combination of these four factors, if managed acceptably, results in an increased market value. Learning is, therefore, fundamental for adaptability and development, and because of its role in several business transactions and dealing the value of training and education require no argument.


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