What is Intellectual Capital?

And why it should be

measured?
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
 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.
 Structural capital
Defined as “ The knowledge that stays within the firm”.
It comprises organizational routines, procedures, systems, cultures and
databases.
Examples
Organizational flexibility, a documentation service, the existence of a knowledge
center, the general use of information technologies and organizational learning
capacity.
Some of them may be legally protected and become intellectual property rights,
legally owned by the firm
 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.
 Organizational capital (structural)
Table of Intellectual capital classification Relational capital
Human capital
(customer) Intellectual Infrastructure
property Assets
Education Customers Patents Philosophy
Qualification Customers Copyrights Culture
loyalty
Work related Company name Design rights Processes
knowledge
Occupational Distribution Trademarks Systems
assessment channels
Work related Licensing service marks Network systems
competences agreements
Know-how Brands Trade secrets Sales system
 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.
Second :
Human Capital and Relational Capital cannot be owned. But must be shared with employees and suppliers and customers. Growing
this kind of capital requires careful supporting .
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 everyone likes
dealing directly with real human beings rather than with systems.
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.
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.
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
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.
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

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)
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.
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.
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 Scorecard