The significance and value of intellectual capital (IC) and intangible assets
The broad meaning of value creation of Intellectual capital is difficult to quantify that is why there are various approaches and value drivers. As Porter’ s market power approach examines the more traditional views that existed in the industrial age it is argued that those forces are static as industry structures change over time; and thus there is a need for flexibility and adaptation to developing resources and dynamic capabilities (Porter, 1985). In addition, these resources may be seen as components of intellectual capital and are split into four types known as market, intellectual property, human centered and infrastructure assets. As prescribed by Annie Brooking, the importance of valuing each is key to managing corporate goals (Brooking 1998: 14).
The broad meaning of value creation of Intellectual capital is difficult to quantify that is why there are various approaches and value drivers. As Porter’ s market power approach examines the more traditional views that existed in the industrial age it is argued that those forces are static as industry structures change over time; and thus there is a need for flexibility and adaptation to developing resources and dynamic capabilities (Porter, 1985). In addition, these resources may be seen as components of intellectual capital and are split into four types known as market, intellectual property, human centered and infrastructure assets. As prescribed by Annie Brooking, the importance of valuing each is key to managing corporate goals (Brooking 1998: 14).
Market Assets
Market assets such as branding may give a company competitive advantage as it gives the company identity and ensures customer loyalty and provides for the continuity of revenues. Ultimately, the company may benefit from the sale of itself and thus having a great brand behind it may facilitate the sale of the company. One example is the case of the Nestle takeover of Rowntree, where Nestle recognized the value that Rowntree had in the brands it carried. One of the appealing factors was the longevity of the brands, plus the chocolate confectionary brands were virtually inflation proof and ensured great distribution of other house brands through sales outlets (Brooking 1998: 20).
Market assets such as branding may give a company competitive advantage as it gives the company identity and ensures customer loyalty and provides for the continuity of revenues. Ultimately, the company may benefit from the sale of itself and thus having a great brand behind it may facilitate the sale of the company. One example is the case of the Nestle takeover of Rowntree, where Nestle recognized the value that Rowntree had in the brands it carried. One of the appealing factors was the longevity of the brands, plus the chocolate confectionary brands were virtually inflation proof and ensured great distribution of other house brands through sales outlets (Brooking 1998: 20).
Intellectual Property Assets
It is commonly known in corporate environment that valuing the know-how, trade secrets, copyrights, patents and design rights a company covers the on-going concern that a firm has to maintain their key differentiators alive and away from competitors. This is very important when it comes to patents as they are embedded in the products as it protects them from others looking to imitate it. Alternatively and interestingly enough there are arguments by those who say that “a patent is only as valuable as the amount of money its owner is prepared to spend defending it.” (Brooking 1998: 37) This may be a valid point as supported by Anne Brooking and the view that a patent may be valued only if it is exploited and defended (Brooking 1998: 37). With respect to extracting value from intellectual property, there is the view that it may be only created by a marketplace success. Gregory E. Gardiner (former managing director of Yale University’s office of cooperative research) made a point of reminding his clients that “a substantial royalty rate from a firm that will fail in the marketplace is worthless, but an equitable royalty rate with a motivated and capable licensee will transform the technology into marketplace results and yield greater revenues on larger-volume product sales” Goldhem et al. (2005: 45).
It is commonly known in corporate environment that valuing the know-how, trade secrets, copyrights, patents and design rights a company covers the on-going concern that a firm has to maintain their key differentiators alive and away from competitors. This is very important when it comes to patents as they are embedded in the products as it protects them from others looking to imitate it. Alternatively and interestingly enough there are arguments by those who say that “a patent is only as valuable as the amount of money its owner is prepared to spend defending it.” (Brooking 1998: 37) This may be a valid point as supported by Anne Brooking and the view that a patent may be valued only if it is exploited and defended (Brooking 1998: 37). With respect to extracting value from intellectual property, there is the view that it may be only created by a marketplace success. Gregory E. Gardiner (former managing director of Yale University’s office of cooperative research) made a point of reminding his clients that “a substantial royalty rate from a firm that will fail in the marketplace is worthless, but an equitable royalty rate with a motivated and capable licensee will transform the technology into marketplace results and yield greater revenues on larger-volume product sales” Goldhem et al. (2005: 45).
Human centered assets
It is commonly discussed that intellectual capital includes the knowledge component of the employees known as ‘human capital’, and it is composed of all the specific skills that are gathered within the firm to include areas such as how to write in the firm’s IT environment, how to commercialize it, and what are the demands of the market, customer relationships, business strategies, competitive information, etc. (Kurz, 2000: 28). As such, human capital produces great benefits the firm must have to maintain competitiveness. Above all, Andersen and Striukova explain that explicit and tacit knowledge is embedded in human capital and argue that “mainstream theory mainly focuses on explicit (i.e. codifiable) knowledge, where as the tacit aspect of knowledge is the most important asset emphasized by institutional economists, evolutionary economists and organizational theorists as well as by resource-based theories of the firm.” (Andersen, Striukova, 2004) Altogether, it is mentioned that the different approaches agree that tacit knowledge can be obtained through the actions and experiences within the firm. (Anderson, Striukova, 2004: 8). To further assist the idea that value is created through tacit knowledge, it may be said that Schumpeter’s ‘entrepreneurial flair’ for innovation comes rooted with tacit knowledge.
Another aspect of intellectual capital and human centered assets in the workplace is the motivation and empowerment of the employee and how it contributes to the value of the overall company. According to Annie Brooking, “There is a mind shift which must take place within the work-force in order for them to accept the reality of companies equipped to operate in the third millennium. Those who make the transition will be motivated and become empowered, increasing their value to the organization” (Brooking, 1998: 58)
Infrastructure assets
Intellectual capital also exposes infrastructure assets such as management philosophy, corporate culture, networking systems to be a great asset to companies as they are an integral part of the collective firm. As mentioned by Annie Brooking, “Infrastructure assets provide strength and cohesion between its people and its process” (Brooking, 1998: 64). And thus it is very important for employees to consistently relate with each other and for the firm to have interactions in its marketplace.
Intangible sources of value in E-Business
Here the discussion will contrast sources of value creation in e-business based on the theoretical views of the value chain of (Porter, 1985), Schumpeter’s theory of creative destruction (Schumpeter, 1942), the resource-based view of the firm (e.g., Barney, 1991), the strategic network theory (e.g., Dyer and Singh, 1998), and transaction cost economics (Williamson, 1975). Thus to start, the value chain framework explores the primary activities of a firm, which have a direct impact on value creation in virtual markets; a good example is Amazon.com, as it built its own warehouses to increase speed and reliability. (Amit, Zott, 2001: 496) Where as, in Schumpeter’s ‘creative destruction’ the premise in value creation is based on technological change and innovation as is seeing in the emergence of virtual markets. In a resource based view of the firm, a specialized set of processes and capabilities may lead to value creation. An example of value creation process is the transfer of capabilities and in the area of virtual markets you have companies such as Barnes and Nobles, Dell and Wal-mart who have successfully integrated their brick and mortar models into e-commerce, Mahmood, et al (2004: 12). Another view in value creation is that of building strategic networks such as strategic alliances, joint ventures, buyer-supplier partnerships, and other ties which according to some practitioners “biotech start-ups can improve their performance by configuring alliances into networks that enable them to tap into capabilities and information of their alliance partners.” (Amit, Zott, 2001: 498). The key are the social network aspects where they are formal or informal strategic networks that help the firm increase the value of marketability. (Andersen, 2009). Having considered these theories, transaction cost economics is also relevant as it analyses transaction efficiency, and one of the main effects of transacting over the internet for companies is the reduction of transaction costs which is of great value.
Furthermore, the central observation of the discussion is that none of the theories mentioned fully explain the value creation in e-business. Amit and Zott in their study of 59 e-businesses found four interrelated value drivers that depict a business model which captures the value creation from multiple sources. (Amit, Zott, 2001) Their study identified four opportunities that create value with the help of e-business: efficiency, complementarities, novelty and lock-in. They noticed that the value creation in e-business goes beyond the framework of value chain, formation of strategic networks or the resource-based theories, and that E-Business firms innovate through novel exchange mechanisms that are not part of the more traditional firm. Cote, L. et al, (2005: 3). At the same time, these exchange mechanisms create new forms of connecting buyers and sellers in existing markets via a virtual market, and can create further value to the firm as it extends the product selection to include additional products to the buyer as it already knows the tastes from knowing its customers. Goldhem, et al, (2005: 45). To illustrate the four value drivers Amit and Zott identified three e-business firms and described how the value drivers are attributed to each. For instance, Autobytel.com shows us that its efficiency is created via the use of rich online content, vehicle valuation reports, and photos. Moreover, the customer is complemented with offers and discounts; future purchases are locked in by offering strong incentive schemes such as reward points; and lastly Autobytel.com is recognized for its ability to continuously implement customer centric innovative services. (Amit, Zott, 2001: 510). Given the theories at hand, none of the them can in and of themselves explain the sources of value creation in e-business and in addition, there is also the view of Zhu and Kraemer as they argue that the link between theory and measures is still weak as there is lack of empirical evidence to measure the use of e-business and the impact on the firm’s performance. (Zhu, Kraemer, 2005: 62).
It is commonly discussed that intellectual capital includes the knowledge component of the employees known as ‘human capital’, and it is composed of all the specific skills that are gathered within the firm to include areas such as how to write in the firm’s IT environment, how to commercialize it, and what are the demands of the market, customer relationships, business strategies, competitive information, etc. (Kurz, 2000: 28). As such, human capital produces great benefits the firm must have to maintain competitiveness. Above all, Andersen and Striukova explain that explicit and tacit knowledge is embedded in human capital and argue that “mainstream theory mainly focuses on explicit (i.e. codifiable) knowledge, where as the tacit aspect of knowledge is the most important asset emphasized by institutional economists, evolutionary economists and organizational theorists as well as by resource-based theories of the firm.” (Andersen, Striukova, 2004) Altogether, it is mentioned that the different approaches agree that tacit knowledge can be obtained through the actions and experiences within the firm. (Anderson, Striukova, 2004: 8). To further assist the idea that value is created through tacit knowledge, it may be said that Schumpeter’s ‘entrepreneurial flair’ for innovation comes rooted with tacit knowledge.
Another aspect of intellectual capital and human centered assets in the workplace is the motivation and empowerment of the employee and how it contributes to the value of the overall company. According to Annie Brooking, “There is a mind shift which must take place within the work-force in order for them to accept the reality of companies equipped to operate in the third millennium. Those who make the transition will be motivated and become empowered, increasing their value to the organization” (Brooking, 1998: 58)
Infrastructure assets
Intellectual capital also exposes infrastructure assets such as management philosophy, corporate culture, networking systems to be a great asset to companies as they are an integral part of the collective firm. As mentioned by Annie Brooking, “Infrastructure assets provide strength and cohesion between its people and its process” (Brooking, 1998: 64). And thus it is very important for employees to consistently relate with each other and for the firm to have interactions in its marketplace.
Intangible sources of value in E-Business
Here the discussion will contrast sources of value creation in e-business based on the theoretical views of the value chain of (Porter, 1985), Schumpeter’s theory of creative destruction (Schumpeter, 1942), the resource-based view of the firm (e.g., Barney, 1991), the strategic network theory (e.g., Dyer and Singh, 1998), and transaction cost economics (Williamson, 1975). Thus to start, the value chain framework explores the primary activities of a firm, which have a direct impact on value creation in virtual markets; a good example is Amazon.com, as it built its own warehouses to increase speed and reliability. (Amit, Zott, 2001: 496) Where as, in Schumpeter’s ‘creative destruction’ the premise in value creation is based on technological change and innovation as is seeing in the emergence of virtual markets. In a resource based view of the firm, a specialized set of processes and capabilities may lead to value creation. An example of value creation process is the transfer of capabilities and in the area of virtual markets you have companies such as Barnes and Nobles, Dell and Wal-mart who have successfully integrated their brick and mortar models into e-commerce, Mahmood, et al (2004: 12). Another view in value creation is that of building strategic networks such as strategic alliances, joint ventures, buyer-supplier partnerships, and other ties which according to some practitioners “biotech start-ups can improve their performance by configuring alliances into networks that enable them to tap into capabilities and information of their alliance partners.” (Amit, Zott, 2001: 498). The key are the social network aspects where they are formal or informal strategic networks that help the firm increase the value of marketability. (Andersen, 2009). Having considered these theories, transaction cost economics is also relevant as it analyses transaction efficiency, and one of the main effects of transacting over the internet for companies is the reduction of transaction costs which is of great value.
Furthermore, the central observation of the discussion is that none of the theories mentioned fully explain the value creation in e-business. Amit and Zott in their study of 59 e-businesses found four interrelated value drivers that depict a business model which captures the value creation from multiple sources. (Amit, Zott, 2001) Their study identified four opportunities that create value with the help of e-business: efficiency, complementarities, novelty and lock-in. They noticed that the value creation in e-business goes beyond the framework of value chain, formation of strategic networks or the resource-based theories, and that E-Business firms innovate through novel exchange mechanisms that are not part of the more traditional firm. Cote, L. et al, (2005: 3). At the same time, these exchange mechanisms create new forms of connecting buyers and sellers in existing markets via a virtual market, and can create further value to the firm as it extends the product selection to include additional products to the buyer as it already knows the tastes from knowing its customers. Goldhem, et al, (2005: 45). To illustrate the four value drivers Amit and Zott identified three e-business firms and described how the value drivers are attributed to each. For instance, Autobytel.com shows us that its efficiency is created via the use of rich online content, vehicle valuation reports, and photos. Moreover, the customer is complemented with offers and discounts; future purchases are locked in by offering strong incentive schemes such as reward points; and lastly Autobytel.com is recognized for its ability to continuously implement customer centric innovative services. (Amit, Zott, 2001: 510). Given the theories at hand, none of the them can in and of themselves explain the sources of value creation in e-business and in addition, there is also the view of Zhu and Kraemer as they argue that the link between theory and measures is still weak as there is lack of empirical evidence to measure the use of e-business and the impact on the firm’s performance. (Zhu, Kraemer, 2005: 62).
The bearing of Intellectual capital and intangible assets on Walt Disney
To show the importance of intellectual capital and intangible assets, one can demonstrate the advancements of various corporations and how they have benefited over time with the emergence and value of intangible assets. To give background, Parr (1996) reported on the management of IC of a number of large U.S. based corporations, that intellectual property and intellectual assets make up more than 80 percent of the corporation’s market value. (Kurz, 2000: 29). According to Parr, “in late 1997, the market value of Walt Disney was $66 billion. Working capital, fixed assets and other assets amounted to $7.3 billion, which means $58.7 billion, or 89%, of Walt Disney’s market value can be attributed to its intellectual property and intangible assets.”(Parr, 1996: 29). As is the case with Walt Disney, intellectual capital assets can contribute a lot of weight to the market value of a company and that is why it is very important for companies and their investors to monitor and manage their intellectual property assets.
To show the importance of intellectual capital and intangible assets, one can demonstrate the advancements of various corporations and how they have benefited over time with the emergence and value of intangible assets. To give background, Parr (1996) reported on the management of IC of a number of large U.S. based corporations, that intellectual property and intellectual assets make up more than 80 percent of the corporation’s market value. (Kurz, 2000: 29). According to Parr, “in late 1997, the market value of Walt Disney was $66 billion. Working capital, fixed assets and other assets amounted to $7.3 billion, which means $58.7 billion, or 89%, of Walt Disney’s market value can be attributed to its intellectual property and intangible assets.”(Parr, 1996: 29). As is the case with Walt Disney, intellectual capital assets can contribute a lot of weight to the market value of a company and that is why it is very important for companies and their investors to monitor and manage their intellectual property assets.
Conclusion
In summary, the early theories value creation of intellectual capital provide great context around how the organization has come to understand and value of such intangibles to give it advantages in business; hence the firm has grown to acknowledge that it values and must integrate these new types of intangible benefits in order to be competitive. Therefore, the firm is aware of the components of intellectual capital and how it must strategize to maximize the use of intangible assets; and overall it must weigh these intangible sources of value as we described in e-business. Lastly, the value of intellectual capital and intangible assets for the firm is inarguably important as we saw in the case of Walt Disney.
In summary, the early theories value creation of intellectual capital provide great context around how the organization has come to understand and value of such intangibles to give it advantages in business; hence the firm has grown to acknowledge that it values and must integrate these new types of intangible benefits in order to be competitive. Therefore, the firm is aware of the components of intellectual capital and how it must strategize to maximize the use of intangible assets; and overall it must weigh these intangible sources of value as we described in e-business. Lastly, the value of intellectual capital and intangible assets for the firm is inarguably important as we saw in the case of Walt Disney.
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