The present and coming years would see the advent of people who do less physical work and more cognitive work. This in essence is intellectual capital.
The economic wealth of any nation or country is more propelled by knowledge, and while nations have in the past depended more on the use of land, equipment, and natural resources, this information age would need nations to depend largely on the application of knowledge in order to create value.
It is increasingly becoming clearer that companies who stay attuned to technologies and devote their time and effort to innovation are usually more successful. Intellectual capital might not naturally appear on an organization’s balance sheets, but it is of immense value – more so than physical assets.
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Intellectual capital is simply and commonly referred to as valuable knowledge. This kind of knowledge has increasingly become the engine of corporate development. Every business has a common goal of maximizing profit, and capital is any asset with the possibility of generating cash flow.
Most assets are tangible, coming in form of physical and financial assets. Physical assets include land, machines, etc. while financial assets may include working capital, shareholders equity, etc. On the other hand, we also have what can be referred to as intangible assets, which are the skills of an organization’s workforce. Because they are intangible, they seem harder to determine or quantify.
The term intellectual capital was first coined in describing intangible assets, by Thomas Stewart, and with the results of various other studies by different scholars, 3 components of intellectual capital were identified:
This is the skill and capabilities of individual employees in a company. This form of intellectual capital is vital because it is the main source of innovation, and an organization’s collective ability to retrieve the best from the knowledge of its employees, either by brainstorming new processes or research. Human capital encompasses the skill, values, experience, and education of the people. Every asset, tangible or intangible, is dependent mainly on people for their continuity and workability. These are controlled by the talent and technical know-how of the employees.
Structural capital consists of a firm’s internal networks, databases, and files. It is the availability of knowledge applications, processes, and other required infrastructure for the execution of the firm’s strategy. The structural capital of any firm consists of elements that include structure, strategy, systems, and culture. When a firm develops new initiatives and invests in technology, its structural capital is improved.
The term is used to refer to customer capital and relational capital. This is the external link which a company has with its customers and suppliers, enabling the procurement and sale of goods and services effortlessly. As a result, measures of this kind of intellectual capital include customer satisfaction, customer loyalty, supplier loyalty, and relationship longevity. The ability to understand what a customer wants or what a customer is looking for in a particular good or service is what sets some businesses apart from their competition.
It is noteworthy that intellectual capital as an intangible asset differs from tangible assets in a variety of ways. These bring to fore the qualities of intellectual capital.
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Qualities of Intellectual Capital
- Intellectual assets differ from physical assets in that they can be used for executing multiple things, while physical assets can only be used for one thing/process/activity at a time.
- Human capital and external capital have to be shared with employees, suppliers, and customers.
- Structural capital as an intangible asset can be owned and controlled by managers, but cannot be traded easily.
- Organisations that are able to leverage their intellectual capital for knowledge work generate higher profit margins.
- Human, structural, and external capital more often than not, work together to produce core competencies. Therefore, organizations are better off investing not only in people, customers, and systems, individually but in the combination of all elements, in order to produce value.
In essence, the Intellectual Capital of a firm is the totality of its Human Capital, Structural Capital, and External Capital (customer capital and relational capital). These assets translate into a competitive advantage that distinguishes one firm from another and drives the innovation of such a firm.
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