Intellectual Capital The Root of Value MGST 601 November 23, 2000

What’s Accounting About? n Methods of monitor and measure the value creation pathways in an organization n Is a present picture of past performance n Does not usually include non-financial performance measurements

What is Intellectual Capital? n A new and enigmatic management concept n It is the root-system of value in a company

Is Understanding IC Important? n IC is the primary source of competitive advantage n The ability to recognize intellectual capital allows you to better manage towards your strategic objective n Understanding IC assets is important in a knowledge-economy

Market Value 1982 Source: Brookings Institute

Market Value 1995 Source: Brookings Institute

What are the Ingredients of Intellectual Capital? Human Ingredient IP Ingredient Infrastructure Ingredient Customer Ingredient Financial Ingredient What is left behind at 5pm It can be owned and thus traded What goes home at 5pm. It cannot be owned

Human Assets n Know-how n Education n Work-related knowledge n Occupational assessments n Work related competencies n Worker satisfaction

Intellectual Property n Patents, Trademarks, Service Marks, Trade Secrets, Design Rights, Copyrights. n These are well understood and can be valued through registration cost, replacement cost or market value.

Infrastructure n Corporate Culture n Management Processes n Information Systems n Network Systems n Financial Relations n Management Philosophy

Customers n Customers n Customer Loyalty n Backlog Orders n Distribution Channels n Business Collaboration

Is this IC Concept for Real? n The CICA is focusing upon developing a standard method - the Canadian Performance Review Initiative (CPRI) - for “performance reporting” measuring: n Quality n Customer Satisfaction n Environmental Performance n IC Performance n Financial Performance

n A recent survey of major US financial institutions found that: n Most were not satisfied with their current accounting systems. n Too much emphasis upon financial measures not enough on non-financial drivers of value n 33% had made a major change in their accounting system in the last two years n 39% planned to make a major change within two years Is this IC Concept for Real?

What’s Bad About IC? n There are many different ways to define IC n There is no common approach…yet n Many aspects of IC are more difficult to measure than others n Cost time and money to implement

What’s Good About IC? n IC measures can be better than financial measures when it comes to meeting strategic objectives n IC is the main source of competitive advantage n IC is better at predicting future performance n It is important to know what IC measurements will inform you best

The End Is IC worth knowing about? n n n n Intellectual Capital: Leif Edvinsson