U5 Intellectual Capital Measurement and Management Flashcards
One of the most valuable assets companies have today is intellectual capital which is comprised of ?
the intangible assets of skill, knowledge, and information.
The market value of leading companies is far higher than?
their value of tangible assets.
The market value of leading companies is far higher than their value of tangible assets. This is especially the case for ?
big technology companies such as Microsoft, Intel, Apple, and Samsung or companies with a strong brand name such as Coca-Cola.
However, despite the recognition of intellectual capital and the existence of a number of proposals, there is still no?
acceptable way of measuring intellectual capital.
This of course makes performance measurement difficult as it is a challenge to?
track changes in intellectual capital over time.
In this unit we want to investigate some of the options and general concepts for measuring intellectual capital and how it can be integrated into a performance measurement framework.
Importance and Challenges of Intellectual Capital Measurement
Intellectual capital can be defined as?
intellectual resources which have been ‘formalized, captured and leveraged’ to create assets of higher value.
For a long time, businesses have acknowledged the importance of?
managing these intangible assets.
The development of brands, stakeholder relationships, reputation, and the culture of an organization are viewed as?
sustainable sources for providing growth and gains.
There is no doubt that the ability to build and leverage the value of these ?
intangible assets represents a core competency of an organization.
Early attempts to measure intellectual capital (IC) focused on?
accounting and financial perspectives of an association.
Intellectual capital, however, has a stronger focus on intellectual material such as?
knowledge,
information,
intellectual property,
and experience which can be used to create wealth.
These intangible assets are difficult to measure since they include?
a large number of organizational and individual variables.
By means of a comparison with tangible assets, the following table summarizes some of the challenges in measuring intangible assets.
Table 5: Comparison of Tangible and Intangible Assets
Table 5: Comparison of Tangible and Intangible Assets
Table 5: Comparison of Tangible and Intangible Assets
Table 5: Comparison of Tangible and Intangible Assets
Simple financial measures fail to recognize the complex nature of————————–.
intangible assets
In order to structure the scope and to reduce the complexity of measurement, intellectual capital can be classified as :
human capital,
organizational capital,
and customer capital.
Figure 11: Classification of Intellectual Capital
Figure 11: Classification of Intellectual Capital
Figure 11: Classification of Intellectual Capital
Human capital refers to ؟
the accumulated value of investments in employee training,
competence,
and future development.
This term also focuses on?
the value of what the individual can produce and how to achieve it;
human capital encompasses individual value in an economic sense. because?
This term also focuses on the value of what the individual can produce and how to achieve it.
Human capital can further be broken down into?
the employees’ competence,
relationship ability,
and values.
Organizational capital is the supportive infrastructure which enables human capital to
——————.
function
In structural terms, that classification can be split into?
organizational capital,
process capital
, and innovation capital.
Organizational capital includes:
the philosophy of a business and systems for increasing the organization’s capability to achieve its goals.
On the other hand, the process capital might include?
the techniques,
procedures,
and programs which implement and enhance the delivery of goods and services.
Innovation capital includes?
intellectual properties and intangible assets.
An organization’s policies
and procedures,
as well as customized software applications, research and development programs,
training courses,
and patents
are examples of ?
organizational\/innovation capital.
Customer capital is considered to be?
the combined value of relationships with customers, suppliers, industry associations, and markets.
Customer capital refers to aspects such as?
trust and understanding, and the strength as well as the loyalty of customer relations.
Customer satisfaction,
repeat business,
financial well-being,
and price sensitivity
may be used as?
indicators of customer capital.
A key reason for measuring intellectual capital is to recognize?
‘hidden’ (potential) assets
and strategically develop them to achieve organizational goals.
The advantages of intellectual capital measurement include the following factors:
=identification and mapping of intangible assets
=recognition of knowledge flow patterns within the organization
-prioritization of critical knowledge issues
-acceleration of learning patterns within the organization
-
-best practice identification and dispersion across the organization by presenting a strong business case for the best practice
-constant monitoring of asset value and finding ways to increase it
-increased understanding of how knowledge creates interrelationships
-understanding social networks within an organization and identifying agents which drive their change
-increase in innovation
-increase in collaborative activities and a knowledge sharing culture as a result of increased awareness of the benefits of knowledge management
-increased identification of employees with the organization and subsequently increased motivation to achieve organizational objectives
-creating a performance-oriented culture
As this summary highlights, measurement of intellectual capital and knowledge management practices can definitely result in?
significant benefits to the organizational success and will therefore help determine business strategy and process design, as well providing competitive advantage.
The next section will describe in more detail how intellectual capital can be measured.
Approaches of Managing and Measuring Intellectual Capital
As intellectual capital is addressed in an organization, it often goes through?/
some evolutionary phases.
The first phase of this process typically starts with?
r
eviewing the vision, mission, and other important strategic initiatives of the business.
As an outcome of this first step, the management usually realizes?
how important intangible assets are and seeks to monitor and manage them in a productive way.
That desire often results in creating a ?
separate function and assigning the responsibility to the human resources executive division.
The next step usually includes:
the definition and monitoring of measures which represent important areas related to intellectual capital issues.
This includes ?
routine reporting,
analysis,
and commentary about identified issues.
A final step is developing benchmarks is indicating where?
the desired measure should be and initiating actions to make improvements where needed.
Both monitoring and benchmarking result in?
identification with and the need for specific intellectual capital projects.
The next figure summarizes the different phases of monitoring and managing intellectual capital.
Figure 12: Phases of Monitoring and Managing Intellectual Capital
Figure 12: Phases of Monitoring and Managing Intellectual Capital
Figure 12: Phases of Monitoring and Managing Intellectual Capital
We have now identified a process of managing intellectual capital, but still need to ?
specify in more detail how intellectual capital can be measured.
There are several groups of methods of measuring the intellectual capital, which can be used in order to evaluate intangible assets.
-Direct intellectual capital methods:
-Market capitalization methods:
-Return on assets methods:
-Scorecard Methods:
Direct intellectual capital methods:
These methods estimate the dollar value of intangible assets by identifying its various components.
Once these components are identified, they can be evaluated, either individually or as an aggregated coefficient.
There are a number of different individual methods which fall into this category. One example is the total value creation (TVC). It uses discounted projected cash-flows to analyze how events affect planned activities.
Market capitalization methods:
These methods are based on ‘market comparables’ and try to calculate the difference between a company’s market capitalization and its stockholders’ equity as the value of its intellectual capital or intangible assets.
Market-to-book-value is one of the most simplistic approaches. The value of Intellectual Capital is assessed as the difference between the stock market value and the book value of the company.
Another example is ‘Tobin’s q ratio’, which is calculated as the ratio of the stock market value divided by the replacement cost of all its assets. Changes in this ratio provide a proxy for effective performance of intellectual capital.
Return on assets methods:
The return of assets (ROA) is defined as the average pre-tax earnings of a company divided by the average tangible assets. This figure can be compared with the industry average of a company.
The difference can then be multiplied by the company’s average tangible assets to calculate an average annual earning from intangibles. Dividing the above-average earnings by the company’s weighted average cost of capital (WACC) provides an estimate for the value of the company’s intangible assets or intellectual capital.
Another method which can be grouped into this category is the economic value added. Changes in economic value added allow an indication of whether a business was able to produce intellectual capital or not.
Scorecard Methods:
This is a very broad category which tries to identify various components of intangible assets or intellectual capital. It uses various indicators, indices and generates a scorecard, which usually is a score value not necessarily related to a dollar value.
Probably the most prominent approach which belongs to this category is the balanced score card concept which we will discuss in a later unit. It tries to combine different performance perspectives including intangible aspects.
Although several approaches and concepts have been developed over the past years, all of them have numerous ————————— in their attempt to measure ——————————–. Hence, there is still a need for refinements and new methods.
shortcomings
intellectual capital
We conclude this unit with a brief and high-level overview of advantages and disadvantages which are connected with different ways to tackle the intellectual capital measurement phenomenon.
Table 6
Table 6
Table 6
Table 6
Table 6
Table 6
Intellectual capital can be divided into the three categories:
human capital,
organizational capital,
and customer capital.
Measurement of intellectual capital can be done in various ways:
Perceptual measurement helps the organization understand employee perceptions and can help to design more acceptable processes.
Process measurement is where current processes are mapped and established and their usefulness and effectiveness is therefore determined.
Financial measurement provides management and shareholders with an overview over the financial value of the intangible assets of an organization.
