Intellectual Capital Management

What is Intellectual Capital Management?

Intellectual Capital Management is a management approach for attaining sustainable growth for a company by identifying, nurturing and enhancing its intellectual capital; the intangible value hidden at the root of a company. It makes full use of an individual company’s specific strength: its intellectual capital.

Most people look only at the fruit, and tend to judge the tree’s value based on what they see. In other words, trees that bear a lot of fruit are seen as valuable, while those that don’t are viewed as having only minimal value. This seems to be the generally-accepted practice.

However, professional fruit growers take a different approach – it is the tree’s roots in which they are interested.

A tree with strong, thick roots is capable of resisting pests and surviving typhoons, and will also produce sweet, highly-nutritious fruit. It takes a great deal of effort to grow a tree with robust roots, such as by enriching the soil with organic fertilizers. A tree with a solid foundation of strong roots will support a thick trunk; plenty of leaves will grow, and as a result, large, sweet fruit will be produced. This kind of tree is a strong tree with genuine value.

For the tree, everything depends on having a solid foundation of strong, robust roots.

This is same kind of activity as keeping the roots of a fruit tree in good condition to make sustainable fruit harvests possible.

First, you identify intellectual capital, then take advantage of its strengths and enhance it. All the relevant people share in the way forward, and make it happen together. The results are accurately disclosed to internal and external stakeholders, to win their consent for the company’s activities. By repetition of this process, your company will attain sustainable growth. This is the idea of intellectual capital management.

This concept was derived from a Scandinavian management model which was a miraculous success in 1991. Today, this management approach is extensively employed by many organizations including governments, companies, universities, and NPOs, and produces many successful results.

Let us replace the tree just described with an actual company, and analyse it.

The fruit represents financial outcomes – in other words, the company’s revenue, profit and/or stock price. Just as many people will value a tree for the fruit it bears, it is common for a company to be judged as either favourable or unfavourable by its financial results, which are easy to visualize. However, this is actually only scratches the surface of the company’s value.

In contrast, a company’s intrinsic value can be equated to the tree’s roots, and this is what is known as the company’s ‘Intellectual Capital (IC).’ Examples of Intellectual Capital may include highly capable employees with healthy work motivation, a management team with a clear vision and the ability to plan firm strategies, innovative and unique technical capabilities, dependable and efficient operational processes, solid trust acquired from customers, a constructive relationship with business partners, and the brand power of the company.

These types of Intellectual Capital are somewhat difficult to visualize from the outside. However, it is these intrinsic ‘roots’ that will nourish the company to bear fruit in the future, and that will provide it with the strength needed to support it through fluctuations in the market environment.
The tree’s trunk and leaves represent the company’s strategies and corporate activities. Their shape resembles the tree’s roots branching out under the ground, and bountiful fruit is produced by stretching the trunk and helping its green leaves to grow.

Intellectual Capital Management (ICM) is management that strengthens company’s ‘roots.’

Intellectual Capital Management (ICM) is a management approach that makes full use of a company’s Intellectual Capital strengths – its roots – and enhances the company’s image as an institution that is beneficial to society.
Intellectual Capital Management believes that ‘Intellectual Capital is the source of a company’s value.’ We believe that there is value in earning the trust and praise of customers, in the ability to develop business know-how and technologies, and in the creativity of management and capabilities and skills of the employees. Intellectual Capital Management aims to strengthen this Intellectual Capital and enhance the potential of the sources from which this value is derived.

Positive financial outcomes are generated as a result of the company aiming to improve, and should not be manipulated directly even in cases where this is possible.

Intellectual Capital Management (ICM) is by no means a lenient form of management. Rotting roots with no hope of recovery must be removed. Conversely, roots that may seem weak at present, but that can be expected to grow well in the future, should be patiently strengthened. Much effort is required to steadily grow these roots to ensure that any sparse areas lacking roots are covered. This takes time and is not a glamorous procedure. However, it is exactly this type of effort that leads to the strong and robust tree that is the company.

Intellectual Capital Management perceives the company as being an organic body or living organism.
A tree’s roots, trunk, leaves and fruit are all interrelated. It is not possible to isolate or replenish one without the other, nor is it possible to enrich solely the ‘fruit.’ Similarly, it is not possible to remove or replace the human capital in a company without looking at the total picture, nor is it possible to improve just the company’s financial outcomes without first improving its Intellectual Capital.

Improving a company’s energy and its ability to cure itself

Until now, many management approaches resembled surgical procedures that attempted to directly remove the ‘lesion’ or affected area using conventional medicine, while Intellectual Capital Management can be compared to a holistic treatment approach such as Chinese herbal medicine, that gradually changes the constitution of the company.

There are many instances in which a surgical procedure can be an effective treatment. For example, an injured person in a traffic accident requires surgery to stop any bleeding. In terms of companies, those undergoing major changes to the external environment, such as a company haemorrhaging funds due to severely deteriorating earnings or one whose current product models have rapidly become obsolete due to technological advancements, may require ‘emergency operations’ in the form of urgent and radical strategic transformations.

However, when based on the view that a company’s only value lies in its monetary value, there is a tendency to force companies to undergo unnecessary and aggressive procedures. For example, if a hand is performing poorly, chop it off and replace it with a robot arm. If the robot arm is too heavy and causes a delay in the pace, chop off the leg as well and replace it with motorized wheels. However, these extreme procedures would not improve the original person’s condition, and even if that were possible, they would be a completely different person to before.
When a person is not feeling well, it is generally due to a minor infection such as a cold or to chronic disease such as diabetes or other adult diseases. Although it is certainly possible that surgical procedures could become necessary as a stopgap measure once a person’s clinical condition has started to deteriorate drastically, their immunity could be weakened if they simply underwent repeated operations.

It is better to prevent illness in the first place by staying healthy through care with diet and exercise, and then to employ the curative power of nature such as holistic treatments wherever possible, to recover in the event that illness does occur. Taking care of one’s health on a daily basis, and increasing one’s strength and autoimmunity, helps people to live better, enjoy more individual lifestyles and live longer.
Similarly, Intellectual Capital Management that aims to improve the organizational constitution will aid the company in sustaining its growth for a much longer period.

 Composition of Intellectual Capital

Corporate value consists of financial capital and intellectual capital.

Financial capital is a tangible corporate value that can be listed on financial statements. However, intellectual capital consists of intangible organizational value, including organizational capital such as patents and IT systems, human capital such as motivated people, know-how, and ideas, and relational capital such as brands, networks, and customer relations.

This framework comprehensively represents the intrinsic value of a company. It has been accepted by the OECD (Organization for Economic Cooperation and Development) and is now a global standard.

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