Intellectual capital: driving business growth and innovation
How can a business maximise its growth and development? What can be done to increase competitive advantage? Are businesses making the best possible use of all their assets?
In an increasingly crowded global economy, all businesses must work hard to remain relevant, competitive and profitable. Innovation is key to maximising business growth and, for many businesses, they already possess the means to achieve it. Alongside this, developing customer-focused, personalised experiences – and adding value through the customer journey – is key. An organisation’s intellectual capital has the potential to achieve both aims, and add significant economic benefit – but what is it, and how is it best utilised?
What is intellectual capital?
Intellectual capital (IC) refers to the value of an organisation’s collective knowledge and resources that can provide it with some form of economic benefit. It encompasses employee knowledge, skill sets and professional training, as well as information and data.
In this way, IC identifies intangible assets, separating them into distinct, meaningful categories. Although not accounted for on a balance sheet, these non-monetary assets remain central to decision making and can have a profound impact on a company’s bottom line. More than ever, IC is recognised as one of most critical strategic assets for businesses.
Broadly speaking, there are three main categories:
- Human capital: the ‘engine’ and ‘brain’ of a company is its workforce. Human capital is an umbrella term, referring to the skills, expertise, education and knowledge of an organisation’s staff – including how effectively such resources are used by those in management and leadership positions. A pool of talented employees, with a wealth of both professional and personal skills, adds significant value to a workplace. Companies who prioritise investing in the training, development and wellbeing of their teams are actively investing in their human capital. It can bring a host of benefits, including increased productivity and profitability.
- Relational capital: this category refers to any useful relationships an organisation maintains – for example, with suppliers, customers, business partners and other stakeholders – as well as brand, reputation and trademarks. Customer capital is adjacent to this, and refers to current and future revenues from customer relationships.
- Structural capital: structural capital relates to system functionality. It encompasses the processes, organisation and operations by which human and relational capital are supported. This may include intellectual property and innovation capital, data and databases, culture, hierarchy, non-physical infrastructure and more.
Each area offers the means for value creation – which is integral to increasing competitiveness. As such, business leaders should prioritise intellectual capital, and its role within operational strategy, in both short-term and long-term planning.
How is intellectual capital measured?
As stated, while IC is counted among a company’s assets, it is not included in its balance sheet. While there are various ways to measure intellectual capital, there isn’t one widely agreed, consistent method for doing so. Together, these aspects mean that quantifying it can be challenging.
Three main methods are generally used to measure IC:
- The balanced scorecard method examines four key areas of a business to identify whether they are ‘balanced’. They are:
- customer perspective – how customers view the business;
- internal perspective – how a company perceives its own strengths;
- innovation and learning perspective – examining growth, development and shortfalls;
- financial perspective – whether shareholder commitments are being met.
A visual tool which communicates organisational structure and strategic metrics, the scorecard provides a detailed overview without overwhelming leaders with information.
- The Skandia Navigator method uses a series of markers to develop a well-rounded overview of organisational performance. It focuses on five key areas:
- financial focus – referring to overall financial health;
- customer focus – including aspects such as returning customers and satisfaction scores;
- process focus – how efficient and fit-for-purpose businesses processes are;
- renewal and development focus – which looks at long-term business strategy and sustainability;
- human focus – sitting at the centre of the others, human focus encompasses employee wellbeing, experience, expertise and skills.
- Market value-to-book value ratio is calculated by comparing a company’s book value with its market value, and aims to identify both undervalued and overvalued assets. A ratio above one indicates that there may be undervalued assets which are not being utilised; a ratio below one indicates there may be overvalued assets which action could be taken to strengthen.
How can a business increase its intellectual capital?
Intellectual capital acts as a value-driver in our twenty-first-century economy. As such, it’s no surprise that many businesses are pivoting to focus on human, relational and structural assets over others. Given both its relative importance and the returns an organisation can expect, finding ways to increase IC could be key to achieving key business goals.
For Forbes, efforts to increase IC mean adopting either a solution-focused or perspective-focused approach. The first refers to the methods by which specific results can be achieved – the what, when, why and where. The second refers to how IC can utilise industry and marketplace trends, forecasts and insights to seize opportunities. Whichever approach a business opts for, there are a number of ways in which to boost intellectual capital efforts. These include:
- Improving employee satisfaction to increase retention rates
- Recruiting individuals with specific knowledge, competencies and skill sets that are currently lacking among the existing workforce
- Auditing and enhancing systems and processes
- Gathering research and data to inform decision making
- Investing in training and development opportunities for employees
- Improving employer branding to both attract and retain the best talent
- Creating new products, services and initiatives through innovation
Influential contributors and further reading
Early and current proponents and authors of intellectual capital thinking include:
- Patrick H Sullivan who wrote ‘A Brief History of the Intellectual Capital Movement’. He presented a concise overview of the beginnings of the discipline in which he traced it back to three origins. These were: Hiroyuki Hami, who studied invisible assets pertaining to Japanese operational management; the work of various economists (Penrose, Rumelt, Wernerfelt et al) which was included in Dr David J. Teece’s 1986 article relating to technical commercialisation; and Karl Erik-Sveiby, who focused on human capital in terms of employee competences and knowledge base. His model of intellectual capital, published in 1997, was a seminal contribution in the field.
- Dr David J Teece published ‘Managing Intellectual Capital’ in 2002, and further publications by him are available on Google Scholar.
- Leif Edvinsson’s 2002 book, ‘Corporate Longitude’, concerned itself with the measurement, valuation and economic impact of the knowledge economy.
- Thomas A Stewart, a pioneer in the field, authored ‘The New Wealth of Organizations’ in 1997. He delved into areas such as unlocking potential hidden assets, spotting and mentoring talented employees, and investigating methods to identify and retain customer and brand loyalty.
The field of intellectual capital continues to expand and evolve globally. Many well-known international figures such as Johan Roos and Nick Bontis continue to explore both its ramifications and applications.
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