Intellectual capital (IC) is just that: a capital asset consisting of intellectual material. As such, it is one of three forms of capital:
- Financial capital;
- Tangible or fixed assets, which include land, buildings, machinery, and other long-lived equipment; and
- Knowledge.
To be considered intellectual capital, knowledge must be an asset – able to be used to create wealth.
Thus Intellectual Capital includes:
- The talents and skills of individuals and groups;
- Technological and social networks and the software and culture that connect them; and
- Intellectual property such as patents, copyrights, methods, procedures, achieves, etc.
It excludes knowledge or information not involved in production or wealth creation. Just as raw material such as iron ore should not be confused with an asset such as a steel mill, so knowledge materials such as data or miscellaneous facts ought not to be confused with knowledge assets.
IC as an Asset
From the standpoint of traditional accounting, Intellectual Capital frequently does not fit the definition of an asset. Generally, under accounting rules, an asset must be tangible:
- It must have been acquired in one or more transactions so that it has a known cost or a market value; and
- It must be under the control of the party whose asset it is said to be.
Thus scientific skill is not an accounting asset, but laboratory equipment is.
Intellectual Capital theory argues that this definition is too narrow and hinders businesses from seeing, managing or building knowledge assets. This, in turn, inhibits a company's ability to compete and prosper in an economy, in which knowledge has become an important source of profits.
The intellectual capitalists use a looser definition: an asset is something that transforms raw material into something more valuable. It is a magician’s black box. Inputs get put in – a few handkerchiefs, say; the asset does something to transform them; and out come outputs worth more than the inputs – rabbit’s maybe. The question of ownership and control matters less than the question of access. A corporation might not own scientific expertise but it has the use of it and can exert a quasi-proprietary influence over how it is used.
Intellectual Capital, then, is knowledge that transforms raw material and makes them more valuable. The raw materials might be physical-knowledge of the formula for Coca-Cola is an intellectual asset that transforms a few cents worth of sugar, water, carbon dioxide and flavorings into dollars worth of refreshment. The raw material might be intangible, like information. Knowledge of the law is an intellectual asset; a lawyer takes the facts of a dispute (raw material), transforms them through his knowledge of the law (an intellectual asset), to produce an opinion or a legal brief (an output of higher value than the facts by themselves).
IC’s Big Three
The three major characteristics of intellectual capital give it extraordinary power to add value to any business, no matter what size and value.
- Companies that use knowledge assets deftly can reduce the expense and burden of carrying physical assets, or maximize their return on them.
- It can be possible to get enormous leverage or gearage from knowledge assets.
- Human and customer capital are the primary sources of innovation and customization.
The increasing sophistication of machinery and information technology has led to the automation of more and more repetitive tasks.
These manufacturing economies of scale are sources of competitive advantage in industrial processes. At a certain point, however, their value diminishes. The more it is possible to do a task the same way twice, the harder it is for one company to differentiate its products and services from its competitors. When this happens, the value of innovation, customization and service increases; all are highly dependent on Intellectual Capital.