Intellectual capital investments constitute a sizable portion of the organization’s valuation. The skills and knowledge of its personnel, systems, and patents, and relationships with customers and suppliers all contribute to the organization’s growth. It is determined by deducting the company’s fair value from the total purchase price of its net identifiable assets.

Intellectual capital is regarded as a business asset because any organization contributes to staff training, customer relationship growth, product development, goodwill building, and so on. Human capital, relational capital, structural capital, intellectual property, know-how, copyrights, patents, or any other information or resources that provide a competitive advantage are all examples of capital. It is difficult to recognize merely goodwill, patents, and copyright. All of the rest are impossible to quantify and hence cannot be recorded in the accounting.

As a result, Intellectual Capital is the capital that contributes to the organization’s wealth. Relational capital, human capital, and structural capital are all included. All items or procedures that contribute to a company’s competitive edge and can be used to generate revenue can be included in its intellectual capital. It is the real wealth of an organization in terms of name, fame, values, etc.

The worth of a firm’s staff expertise, skills, business training, or other proprietary information that may give the company with a competitive advantage is referred to as intellectual capital.

Intellectual capital is a type of asset that can be broadly defined as the collection of all informational resources available to a firm that can be used to increase earnings, recruit new customers, develop new products, or otherwise improve the business. It is the total of a company’s staff skills, organizational processes, and other intangibles that contribute to its bottom line.

Human capital, information capital, brand awareness, and instructional capital are all subgroups of intellectual capital.

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

Companies spend much time and resources developing management expertise and training their employees in business-specific areas to add to the “mental capacity,” so to speak, of their enterprise. This capital employed to enhance intellectual capital provides a return to the company, though difficult to quantify, but something that can contribute toward many years’ worth of business value.

Examples of intellectual capital include the knowledge that a factory line worker has developed over many years, a specific way of marketing a product, a method to cut downtime on a critical research project, or a mysterious, secret formula (e.g., Coca-Cola soft drink). A company can also bolster its intellectual capital by hiring qualified individuals and process experts who contribute to its bottom line.

For example, a mechanic graduates from technical school and starts work at an automobile manufacturer. Their intellectual capital consists of the knowledge they learned at school. After one year on the job, their intellectual capital has increased by the experience they have gained through their job and the specific application of their knowledge. After two years, the mechanic is enrolled in a training program that focuses on new technology and increased efficiency. The mechanic’s, and therefore the company’s, intellectual capital has increased further.

As technology and process improvements become more of a differentiating factor within modern companies, intellectual capital becomes a greater factor in achieving success in a competitive marketplace.

Impact Of Intellectual Capital On Business Organization

The development of wealth and other high-value assets is made possible by intellectual capital. A company’s ability to innovate and its wealth of ideas make up its intellectual capital, which significantly impacts its future.

Innovation

Intellectual property contributes to innovation and innovation processes in business organizations. For example, research contributes to ideas which are further developed to bring about new products and improve the existing ones. Improvement and development of new products lead to commercialization where the products or services are sold in the markets.

Read Also: The Importance of Taxation in Australia

Each component of intellectual capital contributes to the innovation process. For example, human capital contributes to professional competence and motivation that allows the employees to be innovative and have the drive to turn ideas into products. Human capital has contributed to processing innovation where the organizations are able to perform their activities by using imaginative means.

According to a study by Nahapiet (2000) intellectual capital is seen to have a positive impact on innovative capacity. For example, human capital tends to contribute to the incremental and radical innovation. In the competitive environment of today, organizations cannot create wealth unless they actively get involved in innovating which is achievable through intellectual capital. Human capital for example relates to the exposure, experience and creative capabilities of the employees. The better the human capital the more the ability to innovate and bring forth superior output.

Competitive Advantage

In current business environment, intellectual capital gives a competitive advantage to the business organizations. Through intellectual capital, it’s possible for businesses to have successful strategies that cannot be copied easily. For example, businesses can register trademarks, patents, and even copyrights which hinders competitors from imitating the products and the works of the business.

Human capital brings about a competitive advantage since employees are able to add value to the organization through unique skills can capabilities that they acquire through experience and training. The competence of the employees brings forth innovation and product development (Stewart 1998).

The management of an organization should strive towards recruiting as well as grooming the best team in an organization so as to get a competitive advantage in the organization. In addition, it’s important to ensure that knowledge is appropriately stored through intellectual assets which can further improve the competitive position of an organization. The intellectual assets of an organization create value and also increase the financial worth in the organization.

Research and Development

Intellectual property facilitates research and development. For example through human capital, organizations are able to invest in research and development which helps improve the current products and develop new products. Businesses are able to create internal knowledge by investing in research and development. Research and development contribute to more revenues and profitability in an organization. Research and development also contribute to improved processes in an organization.

The more the ability to invest in research and development, the more the potential that an organization can add value to its growth. Organizations with highly skilled and competent employees are able to engage in research and development since human capital can engage in research to discover ideas and areas of improvement.

Without intellectual capital such as the skills and expertise of employees, it’s difficult to engage in research and development and efforts investments in this area cannot be fruitful. Both human capital and structural capital positively contribute to research and development which adds value to an organization and ultimately enhances the survival of an organization by increasing the competitive advantage of an organization.

Business Performance

Intellectual capital brings forth better business performance both in qualitative and quantitative terms. In quantitative terms, intellectual capital contributes to more profitability, return on assets and on investments. Another quantitative aspect in business that increases due to intellectual capital includes the customer retention rate and the market share. Quantitative aspects include customer loyalty and satisfaction and employee satisfaction.

According to Subramien, intellectual capital brings about innovation that in return leads to a competitive advantage which ultimately increases the performance of the firm. Intellectual capital is thus positively related to business performance.

An exploratory study by Bontis shows that the organizations that are able to manage their intellectual capital well are able to perform better and higher than others; Organizations that have better management, functionality, a better culture, and better training programs are also seen to make higher profits. Many businesses, especially in developed countries, have leaned towards better intellectual capital management to boost their profitability.

In the past, the organizational performance was more dependent on the financial and expense items. However, this approach no longer holds researchers have come to the assumption that the success of organizations is highly dependent on the intellectual capital items which contribute to organizational performance.

Intellectual property improves business performance in areas such as profitability, productivity, and market value. According to Chong, the higher the value of intellectual property, the higher the productivity of an organization; also the high value of intellectual property contributes to higher profitability, and subsequently this increases the market value of the organization. Intellectual capital such as patents and trademarks causes the market value of the businesses to increase more than the value of the physical as well as financial assets.

Value Creation

According to Swart, the value that is created by intellectual capital has become more than that created by tangible assets. The service sector, for example, has been able to significantly grow and even exceed other sectors due to investments in intellectual capital. Intellectual capital contributes to changing an organization from an ordinary business to being a leader in the field and in the industry.

Through proper utilization of intellectual assets, an organization can grow into the status of being the industry leader. Managers who are able to effectively manage intellectual capital can be able to come up with better strategies, processes, and even methods of running the businesses to enhance the financial and non-financial performance of the business.

Organizational Strategy

Organizational strategy depends on the competence, skills, and expertise of the individuals in an organization. Employees who are competent and experienced are able to come up with proper strategies that can propel the organization forward. The strategy includes the activities that have to be undertaken to achieve the corporate vision. The various components of intellectual capital have to be properly managed so as to achieve the organizational vision. Proper management of intellectual capital allows the formulation of proper strategies that enable the achievement of organizational objectives.

A business environment that allows the free flow of knowledge is a position to come up with better strategies to enhance survival. Business organizations can only remain competitive if they are able to constantly create, update, and effectively utilize knowledge and intellectual capital to overcome operational and technical challenges. Failure to update intellectual capital and blend it with the existing knowledge can only lead to a failed organization.

Competence and Capability

Intellectual capital enhances competence and capability within an organization. For example, those employees who are well endowed with capabilities are able to share their expertise with others which increases the competence within an organization. Information sharing among the employees helps them to work towards achieving common goals. The collaboration enhances synergy within the organization which ultimately leads to higher organizational performance.

Interactions among the employees create transformed knowledge and through information sharing, an organization is able to achieve the predetermined goals. Organizations need to create an environment that allows information sharing to allow the transfer of knowledge among employees. Transfer of knowledge allows the development of capabilities which eventually lead to better processes and structure within the organization.

Various methods exist to measure intellectual capital but there is no consistency or uniform standard accepted in the industry. For example, the balanced scorecard, which is an industry performance metric, measures four perspectives of an employee as part of its efforts to quantify intellectual capital. The perspectives are financial, customer, internal processes, and organizational capacity.

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

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

Intellectual capital is most commonly broken down into three categories: human capital, relationship capital, and structural capital.

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

Relationship capital encompasses all of the relationships that an organization has, which include its employees, its suppliers, its customers, its shareholders, and so on.

Structural capital refers to the core belief system of an organization, such as its mission statement, company policies, work culture, and its organizational structure.