book.chapter Understanding intellectual capital

The true worth of contemporary corporations cannot be accurately gauged by conventional accounting methods, as these techniques often overlook a company's intangible assets, particularly its intellectual capital (IC). To enhance corporate value, it is crucial for managers to strategically allocate resources towards the efficient and cost-effective generation of new intellectual capital. If successful, this approach will have a more significant impact on the company's market valuation than any other strategy. While business managers and investors are well-versed in the valuation and management of tangible assets, they often struggle with intangible assets. However, market studies suggest that the value of intangible assets is typically three to four times that of a company's tangible asset value as determined by traditional accounting methods. For knowledge-based companies, the value of intangible assets often far exceeds that of tangible assets. Intellectual capital is central to the valuation and management of intangible assets, and thus, to a company's ability to generate additional future value. Intellectual capital measures the hidden dynamic factors that drive a company's performance, including the collective knowledge and competencies of its employees, the value of its brand names and trademarks, assets booked at historic costs that have increased in value over time, dynamic perspectives such as momentum, market position, customer loyalty, quality, and the company's ability to learn and adapt. Efforts have been made to create a standardized model for valuing and managing intellectual capital across various industries and companies, but these have largely been unsuccessful due to the complexities involved. However, in 1995, Skandia, Scandinavia's largest insurance and financial services company, introduced an IC Model that can serve as a foundation for developing a company-specific system for valuing and managing intellectual capital. The Skandia IC Model posits that a company's true value lies in its ability to create sustainable value through the pursuit of a business vision and applicable strategy. A successful business strategy aims to maximize five distinct factors: financial, customer, process, innovation, and human. By evaluating key factors in each of these five areas, leading indicators of a company's future performance can be developed. Since 1995, several companies and regulatory organizations have developed or proposed similar models for valuing and managing intellectual capital. Given the emerging business climate for knowledge-based companies, it is likely that the measurement of intellectual capital will dominate the valuation and management of companies in the future. Therefore, business managers can gain a competitive advantage by adopting an IC-based management system now, rather than waiting until external events force them to do so.