U5 Intellectual Capital Measurement and Management

Question 1

One of the most valuable assets companies have today is intellectual capital which is comprised of ?

Answer 1

the intangible assets of skill, knowledge, and information.

Question 2

The market value of leading companies is far higher than?

Answer 2

their value of tangible assets.

Question 3

The market value of leading companies is far higher than their value of tangible assets. This is especially the case for ?

Answer 3

big technology companies such as Microsoft, Intel, Apple, and Samsung or companies with a strong brand name such as Coca-Cola.

Question 4

However, despite the recognition of intellectual capital and the existence of a number of proposals, there is still no?

Answer 4

acceptable way of measuring intellectual capital.

Question 5

This of course makes performance measure­ment difficult as it is a challenge to?

Answer 5

track changes in intellectual capital over time.

Question 6

In this unit we want to investigate some of the options and general concepts for measur­ing intellectual capital and how it can be integrated into a performance measurement framework.

Question 7

Importance and Challenges of Intellectual Capital Measurement

Intellectual capital can be defined as?

Answer 7

intellectual resources which have been ‘formalized, cap­tured and leveraged’ to create assets of higher value.

Question 8

For a long time, businesses have acknow­ledged the importance of?

Answer 8

managing these intangible assets.

Question 9

The development of brands, stakeholder relationships, reputation, and the culture of an organization are viewed as?

Answer 9

sustainable sources for providing growth and gains.

Question 10

There is no doubt that the ability to build and leverage the value of these ?

Answer 10

intangible assets represents a core competency of an organization.

Question 11

Early attempts to measure intellectual capital (IC) focused on?

Answer 11

accounting and financial perspectives of an association.

Question 12

Intellectual capital, however, has a stronger focus on intellectual material such as?

Answer 12

knowledge,
information,
intellectual property,
and experience which can be used to create wealth.

Question 13

These intangible assets are difficult to measure since they include?

Answer 13

a large number of organizational and individual variables.

Question 14

By means of a comparison with tangible assets, the following table summarizes some of the challenges in measuring intangible assets.

Question 15

Table 5: Comparison of Tangible and Intangible Assets

Question 16

Table 5: Comparison of Tangible and Intangible Assets

Question 17

Table 5: Comparison of Tangible and Intangible Assets

Question 18

Table 5: Comparison of Tangible and Intangible Assets

Question 19

Simple financial measures fail to recognize the complex nature of————————–.

Answer 19

intangible assets

Question 20

In order to structure the scope and to reduce the complexity of measurement, intellectual capital can be classified as :

Answer 20

human capital,
organizational capital,
and customer capital.

Question 21

Figure 11: Classification of Intellectual Capital

Question 22

Figure 11: Classification of Intellectual Capital

Question 23

Figure 11: Classification of Intellectual Capital

Question 24

Human capital refers to ؟

Answer 24

the accumulated value of investments in employee training,
competence,
and future development.

Question 25

This term also focuses on?

Answer 25

the value of what the individual can produce and how to achieve it;

Question 25

human capital encompasses individual value in an economic sense. because?

Answer 25

This term also focuses on the value of what the individual can produce and how to achieve it.

Question 26

Human capital can further be broken down into?

Answer 26

the employees’ competence, relationship ability, and values.

Question 27

Organizational capital is the supportive infrastructure which enables human capital to ------------------.

Answer 27

function

Question 28

In structural terms, that classification can be split into?

Answer 28

organizational capital, process capital , and innovation capital.

Question 29

Organizational capital includes:

Answer 29

the philosophy of a business and systems for increasing the organization’s capability to achieve its goals.

Question 30

On the other hand, the process capital might include?

Answer 30

the techniques, procedures, and programs which implement and enhance the delivery of goods and services.

Question 31

Innovation capital includes?

Answer 31

intellectual properties and intangible assets.

Question 32

An organization’s policies and procedures, as well as customized software applications, research and development programs, training courses, and patents are examples of ?

Answer 32

organizational\/innovation capital.

Question 33

Customer capital is considered to be?

Answer 33

the combined value of relationships with customers, suppliers, industry associations, and markets.

Question 34

Customer capital refers to aspects such as?

Answer 34

trust and understanding, and the strength as well as the loyalty of customer relations.

Question 35

Customer satisfaction, repeat business, financial well-being, and price sensitivity may be used as?

Answer 35

indicators of customer capital.

Question 36

A key reason for measuring intellectual capital is to recognize?

Answer 36

‘hidden’ (potential) assets and strategically develop them to achieve organizational goals.

Question 37

The advantages of intellectual capital measurement include the following factors:

Answer 37

=identification and mapping of intangible assets =recognition of knowledge flow patterns within the organization

Answer 38

-prioritization of critical knowledge issues -acceleration of learning patterns within the organization

Question 39

-

Answer 39

-best practice identification and dispersion across the organization by presenting a strong business case for the best practice -constant monitoring of asset value and finding ways to increase it

Answer 40

-increased understanding of how knowledge creates interrelationships -understanding social networks within an organization and identifying agents which drive their change

Answer 41

-increase in innovation -increase in collaborative activities and a knowledge sharing culture as a result of increased awareness of the benefits of knowledge management

Answer 42

-increased identification of employees with the organization and subsequently increased motivation to achieve organizational objectives -creating a performance-oriented culture

Question 43

As this summary highlights, measurement of intellectual capital and knowledge management practices can definitely result in?

Answer 43

significant benefits to the organizational success and will therefore help determine business strategy and process design, as well providing competitive advantage.

Question 44

The next section will describe in more detail how intellectual capital can be mea­sured.

Question 45

Approaches of Managing and Measuring Intellectual Capital As intellectual capital is addressed in an organization, it often goes through?/

Answer 45

some evolutionary phases.

Question 46

The first phase of this process typically starts with? r

Answer 46

eviewing the vision, mission, and other important strategic initiatives of the business.

Question 47

As an outcome of this first step, the management usually realizes?

Answer 47

how important intangible assets are and seeks to monitor and manage them in a productive way.

Question 48

That desire often results in creating a ?

Answer 48

separate function and assigning the responsibility to the human resources executive division.

Question 49

The next step usually includes:

Answer 49

the definition and monitoring of measures which represent important areas related to intellectual capital issues.

Question 50

This includes ?

Answer 50

routine reporting, analysis, and commentary about identified issues.

Question 51

A final step is developing benchmarks is indicating where?

Answer 51

the desired measure should be and initiating actions to make improvements where needed.

Question 52

Both monitoring and benchmarking result in?

Answer 52

identification with and the need for specific intellectual capital projects.

Question 53

The next figure summarizes the different phases of monitoring and managing intellectual capital.

Question 54

Figure 12: Phases of Monitoring and Managing Intellectual Capital

Question 55

Figure 12: Phases of Monitoring and Managing Intellectual Capital

Question 56

Figure 12: Phases of Monitoring and Managing Intellectual Capital

Question 57

We have now identified a process of managing intellectual capital, but still need to ?

Answer 57

specify in more detail how intellectual capital can be measured.

Question 58

There are several groups of methods of measuring the intellectual capital, which can be used in order to evaluate intangible assets.

Answer 58

-Direct intellectual capital methods: -Market capitalization methods: -Return on assets methods: -Scorecard Methods:

Question 59

Direct intellectual capital methods:

Answer 59

These methods estimate the dollar value of intangible assets by identifying its various components.

Answer 60

Once these components are identified, they can be evaluated, either individually or as an aggregated coefficient.

Answer 61

There are a number of different individual methods which fall into this category. One example is the total value creation (TVC). It uses discounted projected cash-flows to analyze how events affect planned activities.

Question 62

Market capitalization methods:

Answer 62

These methods are based on ‘market comparables’ and try to calculate the difference between a company’s market capitalization and its stockholders’ equity as the value of its intellectual capital or intangible assets.

Answer 63

Market-to-book-value is one of the most simplistic approaches. The value of Intellectual Capital is assessed as the difference between the stock market value and the book value of the company.

Answer 64

Another example is ‘Tobin’s q ratio’, which is calculated as the ratio of the stock market value divided by the replacement cost of all its assets. Changes in this ratio provide a proxy for effective performance of intellectual capital.

Question 65

Return on assets methods:

Answer 65

The return of assets (ROA) is defined as the average pre-tax earnings of a company divided by the average tangible assets. This figure can be compared with the industry average of a company.

Answer 66

The difference can then be multiplied by the company’s average tangible assets to calculate an average annual earning from intangibles. Dividing the above-average earnings by the company’s weighted average cost of capital (WACC) provides an estimate for the value of the company’s intangible assets or intellectual capital.

Answer 67

Another method which can be grouped into this category is the economic value added. Changes in economic value added allow an indication of whether a business was able to produce intellectual capital or not.

Question 68

Scorecard Methods:

Answer 68

This is a very broad category which tries to identify various components of intangible assets or intellectual capital. It uses various indicators, indices and generates a scorecard, which usually is a score value not necessarily related to a dollar value.

Answer 69

Probably the most prominent approach which belongs to this category is the bal­anced score card concept which we will discuss in a later unit. It tries to combine differ­ent performance perspectives including intangible aspects.

Question 70

Although several approaches and concepts have been developed over the past years, all of them have numerous --------------------------- in their attempt to measure --------------------------------. Hence, there is still a need for refinements and new methods.

Answer 70

shortcomings intellectual capital

Question 71

We conclude this unit with a brief and high-level overview of advantages and disadvantages which are connected with different ways to tackle the intellectual capital measurement phe­nomenon.

Question 72

Table 6

Question 73

Table 6

Question 74

Table 6

Question 75

Table 6

Question 76

Table 6

Question 77

Table 6

Question 78

Intellectual capital can be divided into the three categories:

Answer 78

human capital, organizational capital, and customer capital.

Question 79

Measurement of intellectual capital can be done in various ways:

Answer 79

Perceptual measurement helps the organization understand employee perceptions and can help to design more acceptable processes.

Answer 80

Process measurement is where current processes are mapped and established and their usefulness and effectiveness is therefore determined.

Answer 81

Financial measurement provides management and shareholders with an overview over the financial value of the intangible assets of an organization.