Competitive Advantage – Part 2

Why intellectual capital?

It’s so popular, it’s nearly propaganda: the Industrial Age has surrendered to the quiet but ruthless Information Age. What you may not know is that analysts have lain to rest the short-lived Information Age, too. A business culture of technological information harvest is being replaced by a culture of actual knowledge creation. The distinction between the two is clear, says McKinsey: “‘information’ is generally a fact, whereas ‘knowledge,’ which focuses on linkages or relationships, is subjective.”[i] Knowledge, not information, rules the world. Entire companies stem from it, and specific jobs revolve around it. Every company and job require it.

The business environment of the twenty-first century is unpredictable and chaotic. Absolutely critical to a business’s success is adaptability to that environment. (See the white paper “Harnessing Chaos” for more information on adaptive strategy.) But the adage about new wine in old wineskins fits the current situation beautifully: adaptability cannot take place in the present, age-old business structure. As Thomas A. Stewart, author of Intellectual Capital: The New Wealth of Organizations, puts it, “structural capital [alone] cannot break the mold, because it is the mold.”1 Innovation requires a new, hybrid business paradigm.

Such a paradigm accounts for a variety of capital sources. Because shareholders appreciate the link between intellectual savvy and marketable adaptability, the intelligent company’s market price inevitably exceeds its book price. The difference between the two comprises intellectual capital. Luiz Antonio Joia offers a set of equations describing this phenomenon:[ii]

Intellectual capital adds raw value to a company. And not only monetary value, but also the value of flexibility: most companies with large market-to-book ratios are astute enough to morph quickly and innovatively. Adaptability, increased market price, harmony with a knowledge-based business environment: the case in favor of intellectual capital is closed and sealed.

[i] Susanne Hauschild, Thomas Licht, and Wolfram Stein, “Creating a knowledge culture,” McKinsey Quarterly Online (1: 2001). https://www.mckinseyquarterly.com/article_page.asp?tk=355064:991:21&ar=991&L2=21&L3=37

[ii] Luiz Antonio Joia, “Measuring Intangible Corporate Assets: Linking Business Strategy with Intellectual Capital,” Journal of Intellectual Capital Online (1 January 2000). https://www.emeraldinsight.com/journals/jic/sample.htm

Next time we will focus on “How to Find Intellectual Capital.”