1. KNOWLEDGE MANAGEMENT (KM) Session # 17

2. Two Approaches to KVA StepLearning TimeProcess Description 1.Identify core process and its sub processes. 2.Establish common units to measure learning time Describe the products in terms of the instructions required to reproduce them and select unit of process description. 3.Calculate learning time to execute each sub process. Calculate number of process instructions pertaining to each sub process. 4.Designate sampling time period long enough to capture a representative sample of the core process’s final product/service output 5.Multiply the learning time for each sub process by the number of times the sub process executes during sample period Multiply the number of process instructions used to describe each sub process by the number of times the sub process executes during sample period 6.Allocate revenue to sub processes in proportion to the quantities generated by step 5 and calculate costs for each sub process. 7.Calculate ROK, and interpret the results

3. Learning Curves Learning by Doing -Reduces Costs by acquiring more know-how through Production Learn About -Consumer Tastes/Behaviors -operating aquipment and technological rules -Organizational Processes Learning can manifests itself in -Higher Quality -Lower Costs -Better Marketing

4. The Pressure to Measure “Financial reports are next to meaningless. They are out of date, inadequate and don’t provide you with the information that you want.” (CIMA Research) The Fiction in Accounts

5. Cost approachIncome approach Market approach Knowledge value added What is being measured/ valued? Enterprise value and/or percent of enterprise value Enterprise value and/or percent of enterprise value or project value Enterprise value and/or percent of enterprise value Contribution of knowledge to enterprise value What valuation principle is being applied? Enterprise value = Current cost (i.e., market value) of net tangible and identifiable intangible assets. Enterprise value = Present value of Future economic income of the enterprise, as projected from historical performance Enterprise value = Value of publicly held companies as captured in their market multiples. Contribution of Knowledge = Value created in the change process between input and output = Revenue per knowledge unit What is the value indicator? Fair market value of assets and liabilities taken individually or aggregated into classes Present value of p/E ratio, price/book ratio, price/ cash flow ratio, or other relevant multiple Net Present Value of the project ROK, ROP Measurement /Valuation Methodologies

6. Cost approachIncome approach Market approach Knowledge value added What are the data sources used? Historical accounting data and current market cost Historical accounting data; projected accounting data; current market rates of return on equity and debt Historical “guide-line” company data including performance ratios and market multiples; historical private company data Operating/ Process Information: historical accounting data UnitDollars How is value measured? From current market values of Assets and Liabilities From projection of future income streams based on past performance From public market data From current process analysis Measurement /Valuation Methodologies

7. Cost approachIncome approach Market approach Knowledge value added How are intangible assets treated? Intangibles are measured only when identifiable through placement on balance sheet or when linked to identifiable revenue streams Intangibles are aggregated with all other assets in enterprise and enterprise/proje ct is assessed for its ability to generate future economic income Intangibles are aggregated with all other assets in both subject and guideline companies; become an invisible piece of value” represented by market multiples Knowledge, a critical intangible assets, is subject of valuation methodology How is concept of change incorporated into methodology? It is incorporated in a very rudimentary way by bringing historical book values up to current market value It is tacitly incorporated into the projected economic income and into the growth rates. It is not incorporated It is central to KVA since knowledge metrics are based on quantification of the change from input to output. Measurement /Valuation Methodologies (Final)

8. 1.The Economic School Business Performance valuations are currently viewed via a 500 years old double entry book keeping and accounting system (by Pacioli). It recognizes only the tangible assets and includes the costs of material and labor, not the value components of K.Economy. Approaches to KM

9. 1.The Economic School Concerned with both protecting and exploiting a firm’s knowledge or intellectual assets to produce revenue streams (or rent). Approaches to KM

10. 1.The Economic School Here Knowledge is managed as an asset and includes things like Patents, Trademarks, Copyrights, Brands and Know-how. These are all taken as Intellectual Property of a firm and managed through IC Accounting (Measurement) and IC Management. Approaches to KM

11. 1.The Economic School IC is mirrored in its Market Value. The gap between Book Value and Market Value of a company provides the motivation for measuring and managing IC. Value is defined by the Buyer and NOT the Seller so Worth is what the Stock Market says! Approaches to KM

12. Financial capital Human capital Customer capital Process capital Intellectual propertyIntangible assets Market value Intellectual capital Structural capital Organizational capital Innovation capital The Skandia value scheme (Edvinsson, 1997)

13. 1.The Economic School Three components of IC: 1. Human Capital 2. Relational Capital 3. Structural Capital Approaches to KM

14. Intellectual Capital Model Customer Capital Structural Capital Human Capital IC

15. Skandia Navigator: Reporting Model’s Areas of Focus Finance Customers Processes Renewal and Development Humans

16. Finance Customers Processes Humans (soul) inside on the roof, supported Walls of support Renewal and development

17. Knowledge Transfer Within & Between Intangible Assets Experts Customers Support Staff, Systems & Processes € Maximize the capacity of the whole firm to create value, by enhancing the capacity of individuals and teams to act effectively 1 2 3 4 5 6 7 8 9