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Intellectual Capital

The value of a company’s collective knowledge and resources

What is Intellectual Capital?

Intellectual capital refers to the value of a company’s collective knowledge and resources that can provide it with some form of economic benefit. It’s also used to identify a firm’s intangible assets and divide them into meaningful categories.

 

Intellectual Capital

 

The Three Branches of Intellectual Capital

Intellectual capital is broadly summarized into three different types of capital:

 

1. Human Capital

Human capital is the umbrella term for the skills, education, experience, and value of an organization’s workforce. It’s the know-how and expertise of individuals within a company, which can bring the company value. An organization’s human capital also shows how effectively management uses resources to help employees achieve their potential.

 

2. Relational Capital

Relational capital consists of all the valuable relationships that an organization maintains with customers, suppliers, partners, clients, and other external entities. It also encompasses brand names, reputation, and trademarks that a company owns.

 

3. Structural Capital

Structural capital is the organization, process, and innovation capital that supports an organization’s human and relational capital. It includes culture, processes, databases, intellectual property (IP), non-physical infrastructure, hierarchy, and more. It refers to the knowledge and value that belongs to an organization’s structure and processes.

 

Intellectual Capital - Categories

 

Measuring Intellectual Capital

Intellectual capital can be measured in various ways. However, there is no consistent method of measurement that’s widely accepted, and as a result, it can be difficult to pinpoint an exact way to quantify it.

Intellectual capital is considered an “asset” but is not accounted for on a company’s balance sheet, though some of its value is captured in intangible assets like goodwill and intellectual property. Therefore, a company’s financial statements may not reflect the value of its human, relational, or structural capital.

Here are a few methods developed to measure intellectual capital:

 

1. Market Value-to-Book Value Ratio (MV/BV)

The Market Value-to-Book Value Ratio (MV/BV) shows how much a company is valued beyond its financial strength. However, given that several external factors can influence a company’s market value, the ratio may not always be an accurate measure of intellectual property.

 

2. The Balanced Scorecard method

The Balanced Scorecard method is a metric that looks at organizational performance from a financial, customer, internal process, and growth perspective to show how much value is created at each stage.

 

3. The Skandia Navigator

The Skandia Navigator is a collection of measurement methods for intangible assets that cover five broad components: financial, customer, process, renewal and development, and human.

 

Practical Examples

 

Human Capital

Apple’s human capital consists of all the knowledge, expertise, and skills belonging to its individual employees. Therefore, if Apple hires a software engineer who is an expert in artificial intelligence (AI), it effectively bolsters its human capital by adding that extra amount of knowledge.

 

Relational capital

Suppose Company X maintains a long-term, mutually beneficial relationship with its supplier. Such a relationship adds value to the company’s relational capital through a positive reputation and a positive relationship with an external entity. Similarly, brand-loyal customers, trademarks, and partnerships all add to a company’s relational capital.

 

Structural Capital

If a company patented an innovative technology (i.e., intellectual property) or maximized efficiency in decision making and processes through its organizational structure, it effectively added value to its structural capital.

 

More Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Human Development Index
  • Goodwill
  • Knowledge Economy
  • Market to Book Ratio

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!