An owner of any business enterprise needs to understand intellectual capital and how to manage it. Intellectual capital management is about maximizing the value and utilization of the total knowledge that exists in a company and its personnel.
Understanding intellectual capital
There's a trend in today's business world of viewing just about all aspects of a company as some type of capital of the business. In addition to the traditional concept of capital as tangible physical assets, you may hear about human capital, structural capital, relational or network capital, or intellectual capital, all of which have the same meaning.
Intellectual capital may be defined as the total knowledge of a company that may be utilized to add value and create profit. Generally, intellectual capital is considered to be comprised of:
- Human capital. This is defined as the value that the collective knowledge and abilities of employees and owners contribute to the business.
- Structural capital. Also known as organizational capital, this refers to the value of a company's internal systems that facilitate the functioning of the business, such as customer lists and information, accounting and quality-control systems, and employee training programs. It also includes trade secrets, registered copyrights and trademarks, brand equity, and other intellectual property.
- Relational capital. Sometimes called network capital, this is the value of relationships with customers, suppliers, shareholders, government regulatory agencies, and other third parties. It may even include goodwill, or the company's image in the mind of the general public. In a more limited sense, it may also be referred to as customer and supplier capital.
Various writers and theorists classify these concepts in different ways. For example, many classify human capital as a subcategory of intellectual capital, or vice versa. However classified, it is the basic concepts that are important.
Developing and managing intellectual capital
Intellectual capital management (ICM) is a term used to describe the development and management of the knowledge of a business. ICM has the goal of using the combined knowledge available to the company in order to maximize the productivity, profits, and value of the enterprise. How this is done varies considerably based upon the type and nature of the business. Regardless of the nature of the company or its structural organization, ICM typically involves:
- Assessing and cataloging the various types and sources of knowledge within the company
- Analyzing that knowledge to determine how it might be updated, shared within the company, and used in order to maximize its usefulness
- Protecting intellectual property through trademark and copyright registration, as well as through practices and procedures to keep other proprietary and sensitive information confidential
- Optimizing the human capital aspect with strategies and processes related to the acquisition, management, and retention of quality employees
- Developing company policies for creating and maintaining good communication and relationships with customers, suppliers, regulators, and investors
All of this requires good communication between owners, managers, and employees.
Measuring intellectual capital
The fact that intellectual capital has value is obvious. However, unlike a warehouse or machinery, intellectual capital is intangible, therefore it is difficult—if not impossible—to place a dollar value on it. If the value of a corporation's stock exceeds the value of its tangible physical assets, the excess is considered to represent the value of the total intangible assets. However, breaking it down into various components would be very unreliable.
Companies sometimes create an intellectual capital report, which outlines at a high level the various aspects of the intellectual capital but without any dollar values attached. Such a report may only be used in connection with internal planning or it may be shared with shareholders, potential investors, or others in conjunction with the company's usual financial reports.
Intellectual capital management can be a key part of your business's success. The process can be used to maximize profits, protect valuable intangible assets, or even expand a business or attract new investors.
Find out more about Intellectual Property Basics