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Strategic Management Assignment

Intellectual Capital

Presented to: Dr.Adel Zayed.


Prepared By: Ahmed Mohamed Atef Beram.
Group: Eslsca 31-C
Date: June 2010
Introduction

An organization has been established because of human knowledge. All types of


organization. Whether they are manufacturing or servicing firms, they still are based on
organizing, developing, and taking advantage of a mandatory arrangement of fundamental
knowledge. It is widely accepted that the core of managing an organization rests on knowledge.
Every decision making process, planning, strategy implementation of an organization is reliant on
a never-ending gathering, analyzing, and use of relevant data and knowledge. Knowledge sparks
feedback that pushes the organization to act on an impending action. Thus, we can say that
meaningfully collected information sends off commendable knowledge. This is to affirm that on-
going learning, nourishment, and influential administration of knowledge would innovate and
improve people and organization. With knowledge, organizations can enhance and develop their
capability to face the challenges of constant change.

What is Intellectual Capital?

Intellectual capital covers both the human capital and the structural capital putting them
together for more rapid growth. The company value depends on and includes the entire worth of
individuals together with company structure. In fact, as Davenport, et al (1996) stated, “intellectual
capital increases company values and makes business operation more efficient”. In addition,
Bucklew (1991) believed that the sharing of competencies requires management of information.
Information Management and Intellectual Capital (IC) are related. Intellectual Capital involves
human resources, information technology, business strategy and the participation of employees
in order to transfer rapidly necessary experiences in the company. It is energizing and charging
both the national and international operation. To get people to share competencies in the
organization, management must facilitate exchange of knowledge among employees. (Bucklew,
1991) The organization ought to inform the members of available information, make
communication and intelligence accessible, and to train everyone to use the information and
whichever supporting technology the firm may have. (Hunter, 2002)

Intellectual Capital gives sharing of knowledge legitimacy, establishes the worth of


competence in a company and places value on combined individual capabilities and experiences
of co-workers. (Bucklew, 1991) Describing what Intellectual Capital is, Auer (2003) considered it
as the difference between the market and the booking value of an organization. No one denies
that Intellectual Capital is very vital for a knowledge-based firm. However, the company’s annual
auditing report does not contain Intellectual Capital as an asset of the firm. Therefore, for
Intellectual Capital to be noted as an asset of the firm, it must be transformed into knowledge
resources so that the firm can come up with an Intellectual Capital statement. (Dearden, 1997)
Conclusion:
The real value of modern corporations cannot be determined by traditional accounting
methods because these measures fail to accurately allow for a company’s intangible assets – its
intellectual capital (IC) component. Therefore, to maximize the creation of additional corporate
value, managers need to focus strategic resources on the efficient and cost-effective creation of
new intellectual capital. This initiative, if successful, will ultimately have a greater flow-on effect
into the company’s market valuation than any other
approach.

Most business managers and investors are familiar with tangible assets (current assets,
fixed assets, investments) in business valuation and management, but are uncomfortable dealing
with intangible assets. Yet, most market studies have estimated the value of intangible assets are
typically around three or four times a company’s tangible asset value as determined by traditional
accounting methods. For knowledge based companies, the value of the company’s intangible
assets frequently far outweighs the value of its tangible assets. Intellectual capital concepts lie at
the heart of valuing and managing intangible assets - and therefore at the heart of a company’s
ability to create additional future value.

The idea of measuring and comparing intellectual capital within a company is


revolutionary rather than evolutionary. It has the potential to change the way businesses are
organized and managed, and to alter the flow of investment in individual companies and the
broader community as a whole.

The strength of using intellectual capital as the basis for valuation lies in the fact that the
valuation methodology will apply equally well to companies, to non-profit organizations and even
to government departments or branches.

This common valuation base opens up many possibilities, including the potential to
establish global common trading markets with a standardized reporting system - based on
intellectual capital values.

‘‘Tracking intellectual capital is a way for the company not just to find and put to use its hidden
assets but also to reconnect with its people. The changing competitive environment has forced
every company to shred the social contract it had with its employees. And in the process, many
firms have lost track of the real value of their "human capital". IC measurement will be a regular
reminder.’’
-- Gordon Petrash, Dow Chemical