Intellectual Capital Definition

What is intellectual capital?

Intellectual capital is the value of the knowledge, skills, business training of a company’s employees, or any proprietary information that can provide the company with a competitive advantage.

Intellectual capital is considered an asset and can be broadly defined as the collection of all informational resources available to a business that can be used to generate profits, gain new customers, create new products or improve business. company. It is the sum of employee expertise, organizational processes and other intangible assets that contribute to a company’s bottom line.

Some of the subsets of intellectual capital include human capital, informational capital, brand awareness, and educational capital.

Key points to remember

  • Intellectual capital refers to intangible assets that contribute to a company’s bottom line. These assets include the expertise of the employees, the organizational processes and the sum of the knowledge contained in the organization.
  • There is no standard way to measure intellectual capital, and measurement standards vary from organization to organization.
  • Intellectual capital includes human capital, informational capital, brand awareness and educational capital.
  • Companies can increase their intellectual capital by hiring better employees, organizing employee training programs and developing new patents.

Understanding intellectual capital

Intellectual capital is a business asset, although measuring it is a very subjective task. As an asset, it is not recorded on the balance sheet as “intellectual capital”; on the contrary, to the extent possible, it is integrated with intellectual property (as part of intangible assets and goodwill on the balance sheet), which in itself is difficult to measure.

Companies spend a lot of time and resources developing management expertise and training their employees in company-specific areas to add to the “mental capacity”, so to speak, of their company. This capital used to improve intellectual capital provides a return to the business, although difficult to quantify, but something that can contribute to many years of business value.

Measuring intellectual capital

Various methods exist to measure intellectual capital, but there is no consistency or uniform standard accepted across the industry. For example, the Balanced Scorecard, which is an industry performance metric, measures four perspectives of an employee as part of its effort to quantify intellectual capital. The perspectives are finances, customers, internal processes and organizational capacity.

On the other hand, the Danish company Skandia sees the transformation of human capital into structural capital as the mission of intellectual capital. The company designed a house-like structure with financial orientation as the roof, customer orientation and process as the walls, human orientation as the soul, and renewable orientation and development as the platform to measure intellectual capital.

Due to the nebulous nature and defining characteristics of intellectual capital, it is also referred to as intangible assets and environment.

Types of intellectual capital

Intellectual capital is most often divided into three categories: human capital, relational capital and structural capital.

Human capital includes all the knowledge and experience of employees within an organization. It includes their education, life experiences and work experience. It can be increased by providing training.

Relationship capital encompasses all the relationships that an organization has, including its employees, suppliers, customers, shareholders, etc.

Structural capital refers to an organization’s core belief system, such as its mission statement, corporate policies, work culture, and organizational structure.

Examples of intellectual capital

Examples of intellectual capital include the knowledge an assembly line worker has developed over many years, a specific way to market a product, a method to reduce downtime for a critical research project, or a mysterious secret formula (for example, Coca-Cola soft drink). A company can also build its intellectual capital by hiring skilled people and process experts who contribute to its bottom line.

For example, a mechanic graduates from a technical school and starts working for an automobile manufacturer. Their intellectual capital is made up of knowledge acquired at school. After a year of work, their intellectual capital has been enriched by the experience they have acquired in their profession and the practical application of their knowledge. After two years, the mechanic is enrolled in a training program focused on new technologies and increasing efficiency. The intellectual capital of the mechanic, and therefore of the company, has increased further.

As technology and process improvements become a differentiator within modern businesses, intellectual capital becomes a more important factor for success in a competitive marketplace.