Management principles and organizational practices

¶ … Value of a Corporation's Intellectual Capital: Its Impact on the Bottom Line and How it Should Be Managed

This is a proposal on how to analyze the value of corporate intellectual capital and its impact on bottom line management. It has 4 sources and a list of bibliography.

The research aims to identify how corporations' intellectual capital can be evaluated by identifying the factors that contribute to its high valuation. The research also aims to outline strategies that would allow a firm to integrate knowledge management into its management process to enhance its intellectual capital. The basic objective is to shed light to a new management concept in which intellectual capital is integrated as a tool for management instead of a mere accounting head in the balance sheet.

2.Statement of the problem

In today's information technological age, intellectual capital or ICs have become the most visible and valued asset for a company. Whether the company is a manufacturing one or a software developer, each one guard their research base carefully as they would for their financial assets. The professional services like legal advisors and consultants for instance charge us not because they manufacturer something but rather charge for the intellectual knowledge they dispatch to the users. Physical assets tend to get lower valuation as compared to intellectual capital because its expert estimate that an asset cannot enable a firm to explore uncharted territories nor does it help in decision making. The high valuation of the intellectual capital also stems from the fact that they are hard to acquire as well as they do not behave under ordinary rules or processes. Management of such volatile assets becomes difficult and raises the issue of how to value them and how to manage them so that they do not deplete in their market value at present and in the future [Stewart 1991].

3.Brief summary of existing literature

Older management systems did not have a comprehensive framework that would account for intellectual capital. Any valuation of capital on the intellectual capacity was limited to intellectual property laws for items like patents, trademarks or goodwill. These too were not used in regular mainstream business dealing as they are considered to be assets of the company and were taken into account in the balance sheet at the end of the year. However, with the emergence of knowledge management phenomenon, it has become quite difficult for managers to differentiate between intellectual property and intangible properties. For example a decade ago Thomas A. Stewart [1991] considered the intellectual capital as part of strategic planing process because it affects the back office operation like in the case of engineers and scientists. However, in today's work environment even the ordinary workers are also considered to be part of the intellectual capital pool and hence they must be accounted for. To resolve this problem, most corporations have turned to automation to reduce the risk of owning intellectual property. However, that is not the resolution of the problem when despite automation of working process corporations today have to focus on skilled workers and the issue of knowledge management.

Dave Ulrich of Sloan Management Review [1998] has identified the importance of skilled and committed workers to the business. According to him the bottom line for any manager is to pay attention to the intellectual capital as it involve management involvement and commitment to competence workers. If organizations plan and equip itself with policies to appreciate its "capital" then, it will have a higher rate of returns. Furthermore, knowledge and skill has become an integral part of modern day business and implementation of such a strategy has even become more imperative. He proposed the measurable and useful definition of intellectual capital as competence x commitment [Ulrich, 1998].

Traditionally, organizations considered the issue of labor management as part of the economic field and the human capital is the key resource for production facility and economic activity. However, as time changed, it has been seen that the key to ANY organization is its human resources pool. Efficacy of management depends on the level of goal achievements in an organization in terms of its human capacity and its community achievements. This can only be done if organizations demonstrate collective community professionalism. The bottom line is that organizations must contemplate on the fact that they are much dependent on community interactions as well as knowledge. However, it must also be noted that knowledge, intellectual capitals must be defined according to the nature of its use in the organization before its utility can be gauge. For example a know-how and a procedural knowledge is mandatory and routine while innovative knowledge is considered extraordinary especially if it is related to the invention of new service or product [Nahapiet and Goshal, 1998].

4. Study framework

The study will use the following hypothesis for its framework:

As organizations are becoming aware of the importance of intellectual property, they require new management criteria through which they can measure skilled human resources, intangible assets, and intellectual properties under one management process.

More and more businesses are integrating the use of intellectual capitals in the mainstream business process so they require a device / tool through which they can measure the value of their companies. Since intellectual capitals are becoming costly to buy and integrate into business framework management process should be able to act as tools to account for the use of intellectual capitals in the business.