1. INTELLECTUAL CAPITAL lecture (10 )

2. LEARNING OBJECTIVES
To describe the development of the concept of intellectual capital from a historic perspective
To discuss commonalities between different intellectual frameworks as a mixture of human capital, social capital, organisational capital and customer capital
To outline issues related to the notion of intellectual capital as a narrative

3. BUZZ GROUPS
If you were asked to articulate your own personal capital in a job interview, How would you describe your personal capital?
How would you place a value on your personal capital?

4. What is Intellectual Capital? And why it should be measured?

5. Intellectual capital definition
There are plenty of definitions of intellectual capital as example ;
IC is defined as ‘The difference between the market value and the book value ( the value of its intangible assets)’ .
IC is defined as 'The intellectual material – knowledge, information, intellectual property, experience – that can be put to create wealth’
IC is defined as “The intangible assets, such as patents, trademarks and copyrights, that can be included in traditional financial statements.’

6. CONCEPTUAL ROOTS OF INTELLECTUAL CAPITAL (Roos et al., 1997)
Figure 3.1 Conceptual roots of intellectual capital (Roos et al. 1997)

7. HISTORICAL HIGHLIGHTS OF INTELLECTUAL CAPITAL
Table 3.1 History of intellectual capital

8. HISTORICAL HIGHLIGHTS OF INTELLECTUAL CAPITAL
Table 3.1 History of intellectual capital (Continued)

9. Intellectual capital classification
Thomas Stewart is the pioneer in the study of such intangible assets, who coined the term ‘Intellectual Capital’
Intellectual Capital : itself is composed of three distinct types of capital
Human Capital
Structural Capital
Relational Capital

10. Human Capital
Defined as the knowledge, skills and experience that employees take with them when they leave.
Some of this knowledge is unique to the individual; some may be generic.
Examples
Innovation capacity, creativity, know-how , past experience, employee flexibility, tolerance for ambiguity, motivation, satisfaction, learning capacity, loyalty, formal training and education.

11. Structural capital
Defined as “ The knowledge that stays within the firm”. It comprises organisational routines, procedures, systems, cultures and databases.
Examples
Organisational flexibility, a documentation service, the existence of a knowledge centre, the general use of information technologies and organisational learning capacity.
Some of them may be legally protected and become intellectual property rights, legally owned by the firm.

12. Relational capital
Defined as “All resources linked to the external relationships of the firm’' – with customers, suppliers or partners in research and development.
It comprises that part of human and structural capital involved the company’s relations with stakeholders (investors,creditors, customers, suppliers), plus the perceptions that they hold about the company. Examples
Customer loyalty, customer satisfaction, links with suppliers, commercial power, negotiating capacity with financial entities and environmental activities.

13. Table of Intellectual capital classification
Organisational (structural) capital
Relational (customer) capital
Human capital
Infrastructure Assets
Intellectual property
Philosophy
Patents
Customers
Education
Culture
Copyrights
Customers loyalty
Qualification
Processes
Design rights
Company name
Work related knowledge
Systems
Trademarks
Distribution channels
Occupational assessment
Network systems
service marks
Licensing agreements
Work related competences
Sales system
Trade secrets
Brands
Know-how

14. Characteristics of Intellectual Capital
Although Intellectual Capital is similar to tangible assets in its potential for generating future cash flows, it is radically different from tangible capital in the following respects:
First :
Intellectual assets are non rival assets.
Unlike physical assets which can only be used for doing one thing at a time, intellectual assets can be multiplexed.
For example, a customer support system can provide support to thousands of customers at the same time.

15. Second :
Human Capital and Relational Capital cannot be owned.
But have to be shared with employees and suppliers and customers.
Growing this kind of capital requires careful supporting .

16. Third :
Structural capital is an intangible asset that can be owned and controlled by managers. However,
It cannot be traded easily since no markets exist for this purpose.
Moreover ,customers do not care about the structural capital of their suppliers since every one likes dealing directly with real human beings rather than with systems.

17. Fourth :
Structural capital, in the form of some systems as such just-in-time ,management processes, inventory control. Can be substituted for expensive capital expenditure such as storage warehouses.

18. Fifth:-
Firms that leverage their intellectual capital to do knowledge work are able to generate higher margin of profits than those who provide mass-produced solutions.

19. Sixth ;
Human, Structural and Relational Capital often work together in combinations to give rise to core competencies .
Hence it is not enough to invest in people, systems and customers separately, but in combinations that produce end value.

20. WHY DO SHOULD MEASURE INTELLECTUAL CAPITAL?
A review of over 700 papers that studied Intellectual Capital measurement related issues found five generic reasons as the purpose of measuring Intellectual Capital:-
To help organizations formulate and evaluate their strategy
To improve management practices.
To assist in the firm’s diversification and expansion decisions
For use as a basis for management compensation
To communicate with external shareholders; external analysts, bankers, brokers, customers, etc..

21. Methods Of Measuring The Intellectual Capital
There are several group of methods of measuring the Intellectual Capital, which can be used in order to evaluate this assets.
Some of these methods were attempts made by different companies for their internal use rather than the development of a universal measuring method.
these methods can be divided into Four main approaches

22. First : Direct Intellectual Capital Methods (DICM)
Estimate the dollar /value of intangible assets by identifying its various components.
Once these components are identified, they can be directly evaluated, either individually or as an aggregated coefficient (cost)

23. Second Market Capitalization Methods (MCM)
Calculate the difference between a company’s market value and its stockholders’ equity as the value of its intellectual capital or intangible assets.

24. Third Return on Assets Methods (ROA)
Average pre-tax earnings of a company and divide them by the average tangible assets of the company.
The result is a company ROA that is then compared with its industry average..

25. Fourth Scorecard Methods (SC)
Identify various components of intangible assets or intellectual capital and indicators and reported in scorecard as graphs.
The most popular Measurement Method as well as the most widely used of all nonfinancial measurement methods is

26. The Balanced Scorecard What is it?
The Balanced Scorecard is a management tool that provides stakeholders with a comprehensive measure of how the organization is progressing towards the achievement of its strategic goals.

27. The Balanced Scorecard
Traditional financial reporting systems provide an indication of how a firm has performed in the past, but offer little information about how it might perform in the future.
To deal with this problem, Robert Kaplan and David Norton developed the Balanced Scorecard, a performance measurement system that considers not only financial measures, but also customer, business process, and learning measures. The Balanced Scorecard framework is depicted in the following diagram:

28. THE BALANCED SCORECARD (Kaplan and Norton, 1992)
Figure 3.3 The balanced scorecard (from Kaplan and Norton 1992)

29. The Balanced Scorecard
The Balanced Scorecard is the main management tool that has been used by successful organizations in various fields
For Private and Public Sector
For- Profit and Not - Profit organizations
Different industries
The successful organizations placed their strategies at the centre of their operations.

30. The Balanced Scorecard
Balances between the financial and non-financial measures
Balances between the short and long-term measures
Balances between the internal and external measures.
Balances between objective measures and subjective measures.
Balances between leading indicators with lagging indicators.

31. The Balanced Scorecard
The balanced scorecard translates the organization's strategy into four perspectives,
Financial Perspective
Customer perspective
Business process perspective
Learning & growth perspective

32. The Balanced Scorecard
Financial Perspective : includes measures such as operating income, return on capital employed, and economic value added.
Customer perspective - includes measures such as customer satisfaction, customer retention, and market share in target segments.
Business process perspective - includes measures such as cost, and quality. These are for business processes such as purchasing and production.
Learning & growth perspective - includes measures such as employee satisfaction, employee retention, skill sets, etc.

33. These four perspectives are not simply a collection of independent perspectives.
There is a logical connection between them - learning and growth lead to better business processes, which in turn lead to increased value to the customer, which finally leads to improved financial performance

34. Objectives, Measures, Targets, and Initiatives
Each perspective of the Balanced Scorecard includes objectives, Measures of those objectives, target values of those measures, and initiatives, as follows:
Objectives – major objectives to be achieved, for example, profitable growth.
Measures - the observable parameters that will be used to measure progress toward reaching the objective. For example, the objective of profitable growth might be measured by growth in net margin
Targets - the specific target values for the measures, for example, +2% growth in net margin.
Initiatives - action programs to be initiated in order to meet the objective

35. These can be organized for each perspective in a table as shown below.
Objectives
Measures
Targets
Initiatives
Financial
Customer
Process
Learning

36. 4 step process Define measurement architecture
Specify strategic objectives
Choose strategic measures
Develop implementation plan

37. Advantages Translation of strategy into measurable parameters
Communication of strategy
Alignment of individual goals with strategic objectives
Feedback of implementation results

38. The End