Knowledge Capital

What is Knowledge Capital?

Knowledge capital, also known as intellectual capital, is a term used to describe the intangible part of a business’s value. Of course, a business also possesses physical capital that provides tangible value. As such, a business’s value can be divided into two types – tangible and intangible.

Tangible value is quite intuitive. It is the worth of tangible assets (physical capital), which are usually measured by their market value. Some measures of physical capital include:

• Land
• Office buildings
• Machinery
• Stationery (computers, pens, paper)
• Storage warehouses

On the other hand, intangible value is less intuitive. It is the worth of a business’s assets that lack a market value. Such assets are knowledge capital.

Note that there is a related term – intangible asset – that is generally used to describe concrete and identifiable non-physical assets. As such, intangible assets can be considered a part of knowledge capital, but knowledge capital can include capital that isn’t considered an intangible asset.

Understanding Knowledge Capital

Although knowledge capital is not tangible like physical capital, it is nonetheless vital to a company’s success. Often, knowledge capital works in tandem with physical capital by adding to and protecting the value of the products and services produced by the physical capital.

Knowledge capital is generally categorized into three categories:

• Human Capital
• Structural Capital
• Relational Capital

However, it’s extremely important to recognize that the three pillars of knowledge capital are interrelated. That is, without any one of the three forms of knowledge capital firmly established, it is very difficult to fully exploit the other two forms of knowledge capital.

Human Capital

Human capital generally refers to the application of skills and expertise. It is important to note the subtle difference between employees simply possessing the skills and expertise and actually practically applying them. That is because the company only gains the full value of the human capital when the employees are willingly applying their skills and expertise to their full extent.

Caveat of Transferability

One difficulty for companies to retain and continually utilize human capital is that the foundation of human capital, such as the skills employees develop during training and the expertise they gain through working, is inherent within the employees. That is, the human capital of an employee is not owned by the company and can become unavailable to the company when the employee leaves.

In order for a company to retain its human capital, senior management must set an organizational structure that encourages employees to stay, and when an employee does need to leave the company, allows the passing on of the human capital to other employees. Such a healthy corporate structure is a part of structural capital, and this example shows the interconnectedness of the three dimensions of knowledge capital.

Structural Capital

Structural capital refers to the non-physical infrastructure that allows and encourages employees to exploit their human capital. More concretely, they refer to the company’s project processes and databases. Because of the different natures of the diverse kinds of structural capital, it is further categorized into three subcategories:

1. Organization Capital

Organization capital refers to the philosophy that directs the corporate structure and style of communication and is heavily dictated by senior management. It is vital in allowing human capital to function successfully so the company can leverage its capability.

2. Process Capital

Process capital refers to the programs of the company that allow the company to complete its projects and deliver its goods and services competently. Some examples of process capital include:

• Company procedures
• Internal communication methods
• Inter-departmental audits
• Misconduct reporting systems

3. Innovation Capital

The elements that make up innovation capital are those that protect the company’s intellectual properties – in other words, protect the rights to the company’s innovations; hence the name “innovation capital.”  The effect of law in the protection against other companies stealing proprietary images is sometimes known as value protection.

Some examples of innovation capital include:

• Patents
• Trademarks
• Copyrights

Note that the aforementioned “intangible asset” is often used to refer to innovation capital. However, innovation capital is certainly not the only kind of knowledge capital.

Relational Capital

Relational capital describes the value that comes from the company’s relationships with different parties, such as suppliers and consumers.

Examples of the relational capital would be:

• Relationship with customers
• Relationship with suppliers
• Relationship with retailers
• Relationship with governmental and third-party auditors
• Trademarks, company name, and image
• Licenses
• Franchises

Trademarks are innovation capital, as they are the legal property of the company. However, they possess value by virtue of the company’s relationship with customers and so are – when analyzed through the lens of value creation (as opposed to value protection) – a part of relational capital.

More Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Knowledge Economy
• Brand Equity
• Goodwill
• Corporate Structure
• See all valuation resources