The Importance of Intellectual Capital

The Importance of Intellectual Capital

Intellectual capital is a firm's source of competitive advantage

To become knowledge driven, companies must learn how to recognise changes in intellectual capital in the worth of their business and ultimately in their balance sheets. A firm's intellectual capital - employees' knowledge, brainpower, know-how, and processes, as well as their ability to continuously improve those processes - is a source of competitive advantage. But there is now considerable evidence that the intangible component of the value of high technology and service firms far outweighs the tangible values of its physical assets, such as buildings or equipment. The physical assets of a firm such as Microsoft, for example, are a tiny proportion of its market capitalisation. The difference is its intellectual capital.

How do we measure a firm's intellectual capital? How can a firm tell whether its knowledge assets have increased or diminished over a certain period of time? According to Strassman (1998), intellectual capital is what is left over after suppliers, employees, creditors or shareholders and the government have been paid, and obsolete assets replaced. There are other approaches, including those of Sveiby (1997) and of Stewart (1997). One tool that is now widely used by US companies is Kaplan and Norton's Balanced Scorecard, which combines financial with non-financial measures, such as internal business processes, learning and growth, and various customer-related measures (Kaplan and Norton, 1996). Competency models seek to define and classify the behaviours of successful employees and calculate their market worth, while a business worth approach seeks to consider the value of information and the costs of missed or under-utilised business opportunities.