Intellectual Capital: Realizing Your Company's True Value by Finding Its Hidden Roots

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One of the greatest challenges facing any business today is the gap between its balance sheet and its market valuation. This gap, representing the bulk of a company's true value, consists of indirect assets — organizational knowledge, customer satisfaction, product innovation, employee morale, patents, and trademarks — that never appear in its financial reports.

Only in the last few years have companies and academics around the world tackled the challenge of measuring this ...

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Overview

One of the greatest challenges facing any business today is the gap between its balance sheet and its market valuation. This gap, representing the bulk of a company's true value, consists of indirect assets — organizational knowledge, customer satisfaction, product innovation, employee morale, patents, and trademarks — that never appear in its financial reports.

Only in the last few years have companies and academics around the world tackled the challenge of measuring this "Intellectual Capital." And no company has taken IC measurement as far as the Swedish financial services company Skandia, which in 1995 published the world's first IC annual report. The executive who led the team, the first-ever director of Intellectual Capital, was Leif Edvinsson.

Now Edvinsson has teamed up with noted business author Michael S. Malone to write the first book that explains the workings of IC measurement and its usefulness to the modern corporation. Intellectual Capital is also the first book ever to present a universal IC measurement and reporting system.

And that's only the beginning. The authors also show how IC measurement can be used in any organization, including government agencies and nonprofit institutions; they present a simple new measure as a yardstick to compare the IC value and efficiency of different organizations; and finally, they propose a new kind of IC "stock market" exchange.

Intellectual Capital will transform the nature of doing business by establishing the real value of enterprises for those who manage them, work in them, and invest in them. The result will be a revolutionary transformation of the modern economy.

Highly readable and engaging, Intellectual Capital will prove to be one of the landmark business books of this decade.

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Editorial Reviews

Library Journal
The gap between a company's balance sheet and its market valuation is represented by indirect assetsorganizational knowledge, customer satisfaction, product innovation, employee morale, patents and trademarksin short, by "intellectual capital" IC. Edvinsson, of Sweden's Skandia, a financial services company, and business author Malone Virtual Selling, Free Pr., 1996 explain here the workings of IC measurement and its usefulness to modern corporations. The authors show how IC measurement can be used with any organization, including government agencies and nonprofit institutions. They present a simple, new measure to compare the IC value and efficiency of different organizations, even proposing a kind of IC "stock market" exchange. All business collections will want to add this important title.Susan C. Awe, Jefferson Cty. P.L., Arvada, Col.
Library Journal
The manager of intellectual capital for Sweden's Skandia Group, Edvinsson advocates "intellectual capital reporting" as a new type of accounting tool to measure the value contained in the structural and human capital of an organization. (LJ 4/1/97) Copyright 1999 Cahners Business Information.
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Product Details

  • ISBN-13: 9780887308413
  • Publisher: HarperCollins Publishers
  • Publication date: 3/6/1997
  • Edition number: 1
  • Pages: 240
  • Product dimensions: 6.12 (w) x 9.25 (h) x 0.90 (d)

Meet the Author

Leif Edvinsson is Corporate Director of Intellectual Capital at Skandia AFS of Stockholm, Sweden. He is the world's leading expert on Intellectual Capital.

Michael S. Malone is the author of numerous books on business and high technology, including The Virtual Corporation. He has been a columnist for the New York Times and is currently a contributing editor to Forbes ASAP and Upside magazines.

Leif Edvinsson is Corporate Director of Intellectual Capital at Skandia AFS of Stockholm, Sweden. He is the world's leading expert on Intellectual Capital.

Michael S. Malone is the author of numerous books on business and high technology, including The Virtual Corporation. He has been a columnist for the New York Times and is currently a contributing editor to Forbes ASAP and Upside magazines.

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Read an Excerpt

Chapter One

The Hidden Roots of Value

Read a useful prospectus lately? How about an informative annual report?

How come few of these traditional reports anymore offer a clue about which emerging young company is about to take over the world, or about which established, blue-chip company is about to fall into a competitive black hole?

And even when these reports do manage to capture a glimmer of reality, how come those clues lie between the lines of the accompanying, barely legible text and not in bold type on the balance sheet? And why do brokerage houses publish buy or sell recommendations on stocks that seem to have nothing to do with the financial performance of the companies those stocks represent?

Most curious of all, why has the stock market set new records throughout the 1990s when the economy, even during upswings, is consistently weak?

The answer is that the traditional model of "accounting," which so beautifully described the operations of companies for a half millennium, is now failing to keep up with the revolution taking place in business. Like the organization chart, printed corporate brochure, and employee handbook, corporate financial documents are increasingly proving themselves too static and hidebound to keep up with the modern organization, with its fluid structure, strategic partnering, empowered employees, groupware, multimedia network marketing, and vital reservoirs of human intellectual resources.

The chilling fact is this: At this moment we have no idea which companies, large or small, young or old,have sustainable organizational capability.

Rich Karlgaard, editor of Forbes ASAP, identified this disaster and what it would take to fix it in a 1993 editorial:

As an index, book value is dead as a doornail, an artifact of the Industrial Age. We live in the Information Age, of course, though remarkably few people have come to terms with that fact. Failure to understand the declining relevance of book value — and the hard assets that form the ratio's numerator — is proof of this.Human intelligence and intellectual resources are now any company's most valuable assets.The economist who comes up with a better measure of core value will have to account for the new intangible assets so ascendant today.... [For now] society utterly lacks the metrics needed to measure this new source of wealth.

There have always been occasional and temporary gaps between market perception and accounting reality. But now that gap is turning into a chasm. And that in turn suggests we are looking not at a temporary aberration but at a systemic flaw in the way we measure value. A fundamental discrepancy between the story told on corporate balance sheets and the real one played out daily by the organizations themselves.

The business pages of America's newspapers are filled with examples. Southwest Airlines is valued greater than veteran airlines many times its size. Intel suffers a major scandal from flaws in its flagship Pentium chip and its stock price barely breaks stride. Netscape, a $17 million company with fifty employees, goes public with an initial stock offering that values the company at $3 billion by the end of the day. Microsoft, an $8 billion company, announced its Windows 95 operating system and sees its stock climb to more than $100 per share, making the company more valuable than Chrysler or Boeing.

It has become obvious that the real value of these companies cannot be determined by only traditional accounting measures. The worth of an Intel or Microsoft lies not in bricks and mortar, or even in inventories, but in another, intangible kind of asset: Intellectual Capital.

In the words of Walter Wriston in his influential book The Twilight of Sovereignty, "Indeed, the new source of wealth is not material, it is information, knowledge applied to work to create value.

Toward A Definition



What is Intellectual Capital? Until now, the definition has been elusive. But in recent years, driven by necessity, individuals and groups in diverse disciplines have begun to tackle the challenge of finding a standardized explanation.

SEC commissioner Steven M. H. Wallman includes under his definition of Intellectual Capital not just human brainpower but also brand names and trademarks, even assets booked at historic costs that have transformed through time into something of greater value (like a forest bought a century ago that now is prime real estate). All, in his words, are "assets currently valued at zero on the balance sheet."

Other researchers include in their definition of Intellectual Capital such factors as technology leadership, ongoing employee training, even speed of response to client service calls.

For venture capitalist and business writer William Davidow (The Virtual Corporation), "There's a need to move to a new level in accounting," he says, "one that measures a company's momentum in terms of market position, customer loyalty, quality, etc. By not valuing these dynamic perspectives, we are misstating the value of a company as badly as if we were making mistakes in addition."

For H. Thomas Johnson, professor of business administration at Portland (Oregon) State University, Intellectual Capital hides within that most mysterious traditional accounting entry, "goodwill." The difference, he says, is that traditionally goodwill emphasized unusual, but real, assets such as trademarks. By comparison, he says, Intellectual Capital looks beyond to more ineffable assets such as the ability of a company to learn and adapt.

Wrote Industry Week in early 1996:
Managers struggl[e] in the here and now to adjust to the shift in the center of economic gravity from the management and measurement of physical and financial assets to the cultivation and leverage of knowledge as the most significant acts of value creation.And it applies as much to Microsoft as it does to a knitting mill in the wilds of Canada weaving berets on a machine bought by the proprietor's great-grandfather in 1919. Ask an executive from either firm what percentage of total value they would attribute to intangible assets — everything from individual skills and know-how to IT systems, designs, and trademarks to supplier relationships and customer franchise — and you get the same answer: upward of 80 percent...
Intellectual Capital copyright © by Leif Edvinsson. Reprinted by permission of HarperCollins Publishers, Inc. All Rights reserved. Available now wherever books are sold.
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Table of Contents

Foreword
1 The Hidden Roots of Value 1
2 The Hidden Capabilities of a Corporation 23
3 Finding Its Way 41
4 Navigating Through a New World 65
5 Real Value: The Financial Focus 75
6 Real Worth: The Customer Focus 89
7 Real Work: The Process Focus 101
8 Real Future: The Renewal and Development Focus 111
9 Real Life: The Human Focus 123
10 All Together Now 139
11 A Common Value 173
12 A Future Market 199
Notes 211
Index 217
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