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JIC
1,1
68
Journal of Intellectual Capital,
Vol. 1 No. 1, 2000, pp. 68-84.
# MCB University Press, 1469-1930
Measuring intangible
corporate assets
Linking business strategy with
intellectual capital
Luiz Antonio Joia
Rio de Janeiro State University, Brazil
Keywords Intellectual capital, Business strategy, Intangible assets, Performance evaluation,
Knowledge economy
Abstract Since the beginning of this decade research has been conducted in order to define a
feasible and reliable path to measure the intangible assets of a company, also called its intellectual
capital. Several models have been defined, though problems still remain to be solved. In this article
a heuristic frame addressing the link between intellectual capital and business strategy is
developed, according to the author's proposed intangible corporate asset taxonomy. This model is
then applied to a company within the magnesium industry. The ``time-lag trap'' issue is presented
showing the misconceptions arising from the static rather than the dynamic intangible asset
valuing approach. Future trends such as the creation of the IC elasticity concept and some
conclusions in this realm are also presented.
Introduction
The understanding of knowledge as a strategic weapon for a corporation is all
but recent. In 1945, Frederick Hayek presented research about the use of
knowledge in society (Hayek, 1945). In 1962, in a seminal work, Fritz Machlup
from Princeton University produced an eight-volume work under the general
title: Knowledge: Its Creation, Distribution, and Economic Significance (Stewart,
1997). In this work, it was concluded, using 1958 data, that 34.5 per cent of the
gross national product of the USA could be allocated to the information sector.
In 1993, Peter Drucker analysed a new knowledge economy and its
consequences (Drucker, 1993). Therefore, increasingly the importance of the
intangible assets of a corporation, and even those of both countries and any
other organisations ± including non-profit entities ± have been highlighted by
academics, researchers and practitioners.
Several publications deserve mention for their own merits, as Kaplan and
Norton's The Balanced Scorecard (1997) and ``The valuation of intangible
assets'', prepared by Arthur Andersen with The Economist Intelligence Unit
(1992). However, a watershed was reached in July 1994, when a meeting took
place in Mill Valley in order to establish how the knowledge of an organisation
could be measured. Knowledge may be intangible, but that does not mean that
it cannot be measured. As we know, markets do it when they value the stock of
some very knowledge-intensive companies way above their book value.
The new knowledge economy is already a reality, going against Marshall's
law of diminishing returns and contending that the more you apply a resource
the more the same resource is generated and thus the more value that resource Measuring
creates in the final product (Arthur, 1996). intangible
In 1995, Skandia ± the largest insurance and financial services company in
Scandinavia ± released its Intellectual Capital Annual Report, based on its
corporate assets
navigator framework (Edvinsson and Malone, 1997). Some other companies,
like Dow Chemical, Canadian Imperial Bank of Commerce, Posco etc., to name
but a few, entered this new era. 69
Data, information and knowledge
Considerable confusion still prevails between the information economy and the
knowledge economy. This comes from the misunderstandings about the
differences between data, information and knowledge.
Data mean a set of discrete and objective facts concerning events. Therefore,
they can be construed as a structured record of transactions within an
organisation (Davenport and Prusak, 1998).
Information is data that make a difference and are relevant, or as Peter
Drucker says: ``information is data with attributes of relevance and purpose''.
Normally, information is understood as a message, usually having the format
of a document or visual and/or audible message. Information is, above all,
context-based.
Knowledge is linked to the capacity for action (Sveiby, 1997). It is intuitive,
therefore hard to define. It is linked to the user's values and experience, being
strongly connected to pattern recognition, analogies and implicit rules. Most of
the time, knowledge within an organisation is to be found both inside
employees' heads (tacit knowledge) and in documents (explicit knowledge).
This explains why such confusion has arisen between document management
and knowledge management.
Although it is a generally accepted distinction, doubts have been cast
recently over the tacit-explicit dichotomy (Polanyi, 1958). According to the
autopoietic epistemology school (Varela et al., 1992), knowledge is a private,
personal thing, and as such an organisation cannot possess it. Therefore,
knowledge cannot be explicit, only tacit: explicit knowledge is actually data
and/or information which enable other people to create their own knowledge
through what is known as ``structural coupling'' (Joia, 1999). However, this
article will accept the tacit-explicit distinction, which will allow us to draw
more pragmatic conclusions.
Thus, assuming the tacit-explicit dichotomy, the following mathematical
formulas depict what was said (Joia, 1999):
INFORMATION = DATA +  (attributes, relevance, context)
KNOWLEDGE = INFORMATION +  (experience, values, patterns, implicit
rules)
An evolution in these concepts is being demanded by some researchers, in
order to analyse the next step: wisdom. From the philosophical point of view it
is a great idea but, pragmatically, knowledge and intangible assets are already
tough enough parameters to be pinned down.
JIC Intangible corporate assets
1,1 In this article, we will avoid dealing with absolute values as it is worthless
establishing what the intellectual capital of a given firm amounts to in dollars.
The market to book value ratio (M/B) will be used as an effective yardstick for
measuring intangible assets.
Based on research carried out by Edvinsson and Malone (1997), Roos et al.
70 (1997), Sveiby (1997) and Stewart (1997), it is proposed that a corporate capital
taxonomy be used in this article. It is assumed that:
MARKET VALUE = BOOK VALUE + INTELLECTUAL CAPITAL
This equation shows that stock value has a tangible portion (book value) in
addition to an intangible component. Hence, supposing the intellectual capital
is greater than zero (IC > 0), the market value/book value is greater than one
(M/B > 1). The more knowledge-intensive the company is, the greater the M/B
value is, as shown in Table I, as of November 1996 (Stewart, 1997).
As can be seen, the market perceives in Microsoft a far greater element of
intangible value than in IBM. Some might say that differing depreciation
policies might influence the book value calculation. It is a valid point, and is the
reason why Tobin (1969) suggests the use of replacement cost, defining q as
(market value)/(replacement cost of the assets). The replacement cost concept
was developed in order to circumvent the differing depreciation policies used
by accountants world-wide. If q is greater than one, the asset is worth more
than the cost of replacing it; thus it is likely that the company will seek to
acquire more assets of this kind.
An analytical framework to calculate q was developed at the Kellog School
of Business at Northwestern University. This framework, named NCI,
calculates the replacement cost of an asset as: replacement cost = fixed assets +
back accumulated depreciation + inflation (Stewart, 1997). As we are going to
work with ratios instead of absolute values, the value of q is irrelevant for our
model, as it will influence equally all the parameters involved.
The book value is then calculated by the following formula:
BOOK VALUE = MONETARY CAPITAL + PHYSICAL CAPITAL
and intellectual capital, formerly called goodwill by accountants, is calculated
using the formula below:
INTELLECTUAL CAPITAL = HUMAN CAPITAL + STRUCTURAL
CAPITAL

Company Market value (M) Book value (B) M/B

IBM $70.7 billion $16.6 billion 4.25

Table I.
(M/B) values Microsoft $85.5 billion $930 million 91.93
Human capital does not belong to the firm, as it is a direct consequence of the Measuring
sum of its employees' expertise and skills. Structural capital belongs to the intangible
company, and can be traded (at least theoretically), being the actual corporate assets
environment built by the firm to manage and generate its knowledge
adequately. It is compounded of all the internal and external processes that
exist within the firm and between it and the other players; namely the
relationship capital that is concerned with the customers, suppliers, 71
subcontractors and other major players involved ± as metabusiness is today a
reality, it being hard to define a firm's boundary (Joia, 2000); and innovation
capital, a direct consequence of the firm's culture and its capacity of creating
new knowledge from the existing supply. Thus, the following formula
summarises what has been said above:
STRUCTURAL CAPITAL = PROCESS CAPITAL + RELATIONSHIP
CAPITAL + INNOVATION CAPITAL
Finally, the intellectual capital formula can be presented altogether:
INTELLECTUAL CAPITAL = HUMAN CAPITAL + INNOVATION
CAPITAL + PROCESS CAPITAL + RELATIONSHIP CAPITAL
Figure 1 depicts all these concepts, showing the components of intellectual
capital (the intangible assets) as grey filled boxes, all of them having the same
relevance for the firm.

Methodology
The methodology used in this article draws from the existing models put
forward by Edvinsson and Malone (1997), Roos et al. (1997), NCI's Kellog
School of Business at Northwestern University (Stewart, 1997), Sveiby (1997),
Klein (1998) and Winter (1998). In the latter article, the heuristic frame concept

MARKET
VALUE

BOOK INTELLECTUAL
VALUE CAPITAL

Physical Monetary Human Structural

Capital Capital Capital Capital

Figure 1.
Intellectual capital
Innovation Process Relationship
Capital Capital Capital taxonomy
JIC developed by Winter in his article ``Knowledge and competence as strategic
1,1 assets'' is heavily used, being the model proposed later in this research
classified as a heuristic frame. As Winter says:
A heuristic frame corresponds to a degree of problem definition that occupies an intermediate
position on the continuum between a long and indiscriminate list of things that might matter
at one end and a fully formulated control-theoretic model of the problem at the other. Within a
72 heuristic frame, there is room for a wide range of more specific formulations of the problem ±
but there is also enough structure provided by the frame itself to guide and focus discussion.
On the other hand, a rich variety of different heuristic frames may represent plausible
approaches to a given problem (Winter, 1998, pp. 172-3).

Based on this assumption, the methodology presented is one among many that
can still be used in the very near future and represents an effort to overcome the
paralysis by analysis effect (Ansoff, 1984) too common when dealing with
intangible things, leading to everlasting discussions rather than practical
results. A model is good not on account of the excess of rigour it applies itself,
measured by the number of variables taken into consideration, but rather if it
adequately models and expresses the reality we are facing. Hence, complexity
is not necessarily synonymous with good results, and some flexibility is
required when dealing with topics for which a great amount of critical sense is
needed.
In the article ``Knowledge as strategy'' (Earl, 1997), it is possible to infer that
ascribing value to corporate intellectual capital and its components is only
worthwhile if linked with the firm's business strategy. From the business
strategy it is possible to get the company's mission statement and its broad and
focus-based action plans. To accomplish these results some indicators must be
defined and classified according to the intellectual capital taxonomy presented
above. Weights must be defined by the strategist for each one of these
indicators. All the intangible capital can then be calculated through the blend
between the data available for the indicators and their weights. The
composition of intellectual capital as a whole is an exercise that has been
incorrectly understood until now. Edvinsson and Malone (1997, p. 187) propose
that intellectual capital is the arithmetic mean of all the capital components in
play. On the other hand, our statistical correlation shows that some kind of
weight drawn from the business strategy must be applied to define intellectual
capital as a whole. This is done in the methodology presented. Naturally, we
look forward to finding a very high correlation between intellectual capital
values and market values, as time goes on. Intellectual capital on its own is
worthless. It must be understood as a way of refining the firm's business
strategy, through positive feedback (Arthur, 1990). By the same token, a poor
relationship between intellectual capital ratings and market values is, by
definition, proof of either a bad model or biased data as stated by Roos et al.
(1997). Some hidden effects, such as the ``time-lag trap'' defined later in this
article, must be taken into account to avoid this.
The methodology calls for the application of the proposed framework in an
actual company within the magnesium industry. This industry is fairly well
consolidated; nevertheless innovations are still being introduced, albeit at a far Measuring
different pace from companies within the information and telecommunication intangible
technology industries. corporate assets
This research also takes into account that nowadays strategic planning is
under attack (Mintzberg, 1994; Hamel, 1996), but the reality shows it as the tool
still commonly used at most companies world-wide, despite its flaws.
73
The steps of the proposed methodology
As stated above, the proposed methodology draws heavily on strategic
planning concepts, based on business strategy development (Hax and Majluf,
1991), and intellectual capital concepts. These two realms are linked in such a
way that it is possible to analyse the evolution of a company's market value as
well as its intellectual capital rating over the course of time. The concepts of
knowledge flow and stock are both paramount, as some capital such as
innovation and human capital may not alter a firm's efficiency and
effectiveness synchronously. This asynchronous effect, henceforth referred to
as the ``time-lag trap'', needs to be analysed in depth.
The following steps were followed in our methodology:
. analysis of some of the existing models to evaluate the intangible assets
of a company;
. selection of a well-known business strategy formulation model;
. building a bridge between strategy and intellectual capital in order to
link both models;
. specification of a heuristic frame for valuing a firm's intellectual capital
and its components, over the course of time;
. use of this frame in an actual case study, comparing the correlation
between the firm's intellectual capital ratings (and its components ones)
and its shareholder value, over the course of time;
. detection of some modifications required in the proposed model, as well
as some flaws that had still not been deeply studied by practitioners and
researchers regarding intangible valuing models;
. codification of a model for rating intellectual capital, human capital,
innovation capital, process capital and relationship capital of a firm,
including some modifications drawn from the simulations undertaken
previously.

A proposed framework for rating intangible capital

As explained above, we aim to link a firm's business strategy and intellectual
capital, then the foundations upon which this model will be built will be
presented.
JIC The business strategy realm
1,1 Reviewing Hax and Majluf's business strategy formulation methodology
(1991), we can elaborate the following diagram, presented in Figure 2.
To realise each specific action program (SAP ij), some indicators must be
established. Once chosen, all these indicators must be represented as a
percentage. Naturally, some of these values will be given either as absolute
74 numbers or as amounts of money. However, there is always a way to convert
these values into percentages, either by dividing them by other values or by
comparing them with the industry's best performance, through a benchmark
analysis. In order to perform this, data envelopment analysis (DEA) is used.
This methodology looks for the companies implementing best practices,
seeking to identify, other things being equal (e.g. for a given level of output), the
companies which achieve the best indicator performance (Cubbin and
Tzanidakis, 1998).
By the same token, priority must be assigned to each SAP ij. Using Hax and
Majluf's (1991) methodology, three priorities were defined:
(1) absolutely first priority;
(2) highly desirable; and
(3) desirable.
As these priorities will be used later to calculate the consolidated intellectual
capital, it is necessary to define weights for each one of these, as shown in
Figure 3.

The intellectual capital realm

As defined earlier, there is no interest in an absolute value for intellectual
capital, mainly expressed in dollars, but rather in tracking its variations over
the course of time, as well as of its component values. Intellectual capital
components are: human capital (HC), innovation capital (IVC), process capital

MISSION
MS STATEMENT

BROAD ACTION BROAD ACTION BROAD ACTION

BAP i PROGRAM 1 PROGRAM i PROGRAM n

Figure 2. SAP Specific Specific Specific Specific Specific Specific

Business strategy model ij Action
Program 1.1
Action
Program 1.2
Action
Program i.1
Action
Program i.2
Action
Program n.1
Action
Program n.2
(PC) and relationship capital (RC). All indicators previously defined for each Measuring
specific action programme are then classified as belonging to some intellectual intangible
capital component, in such a way that an incidence matrix for a specific year corporate assets
t - [Wt] ± can be developed, as shown in Table II.
As can be seen in the example shown, the following consistencies must be
followed for year t under analysis:
. %Iijk must be equal to or less than 1.0; 75
. The sum of the [Wt] column must equal 1.0, or more specifically:
WHCijk; i = 1,nBAP; j = 1,nSAP; k = 1,nIndicators = 1.0
WPCijk; i = 1,nBAP; j = 1,nSAP; k = 1,nIndicators = 1.0
I
WRCijk; i = 1,nBAP; j = 1,nSAP; k = 1,nIndicators = 1.0
WIVCijk; i = 1,nBAP; j = 1,nSAP; k = 1,nIndicators = 1.0

Intellectual capital rating

Now, it is possible to link the business strategy and intellectual capital realms
in order to evaluate the intangible capital ratings for a specific year t, through
the calculation of the weighted mean of each capital. Hence, for each year t, we
have:
. HCt =  (%Iijk).(WHCijk); for (i = 1,nBAP; j = 1,nSAP; k = 1,n Indicators)
. PCt =  (%Iijk).(WPCijk); for (i = 1,nBAP; j = 1,nSAP; k = 1,n Indicators)
. RCt =  (%Iijk).(WRCijk); for (i = 1,nBAP; j = 1,nSAP; k = 1,n Indicators)
. IVCt =  (%Iijk).(WIVCijk); for (i = 1,nBAP; j = 1,nSAP; k = 1,n Indicators)
or using a more concise and elegant mathematical language:
[HCt PCt RCt IVCt] = {I}T. [Wt]
where {I} is the indicator array and [Wt] is the incidence matrix for year t.
It is very important to compile all these capitals consistently in order to
determine the intellectual capital (IC) rating. Edvinsson and Malone (1997)
suggest that IC is the arithmetic mean of all its components. This assumption
does not take into account the priorities (Pij) of each indicator in the business
strategy plan, leading to inadequate results as is shown in our case study

Specific Action Indicators (Iijk) - (%) Benchmark

Program SAP ij Analysis Competitors

Priority (Pij) DEA

(Data Envelopment Analysis)
Figure 3.
•Absolutely First Priority (Pij = 3) Specific action program
•Highly Desirable (Pij = 2) structure
•Desirable (Pij = 1)
 76

1,1
JIC
The incidence matrix
Table II.

Broad action Specific action Indicators Year t (values) HCt PCt RCt IVCt
programmes programmes Priority (descriptions) (%) (weights) (weights) (weights) (weights)
BAPi SAPij Pij Iijk %Iijk WHCijk WPCijk WRCijk WIVCijk

BAP1 SAP11 Highly I111 %I111 WHC111 WPC111 WRC111 WIVC111

desirable I112 %I112 WHC112 WPC112 WRC112 WIVC112
(P11 = 2)
I113 %I113 WHC113 WPC113 WRC113 WIVC113
I114 %I114 WHC114 WPC114 WRC114 WIVC114
I115 %I115 WHC115 WPC115 WRC115 WIVC115

SAP12 Desirable I121 %I121 WHC121 WPC121 WRC121 WIVC121

(P12 = 1) I122 %I122 WHC122 WPC122 WRC122 WIVC122
I123 %I123 WHC123 WPC123 WRC123 WIVC123
I124 %I124 WHC124 WPC124 WRC124 WIVC124
I125 %I125 WHC125 WPC125 WRC125 WIVC125
I126 %I126 WHC126 WPC126 WRC126 WIVC126
below. Therefore, since it is paramount to represent all the impacts of business Measuring
strategy on the intellectual capital rating, it is necessary to calculate the intangible
influence of the action programme priorities on each capital indicator. Then, the corporate assets
following procedure can be used for a specific year t:
. P_HCt (total priority associated to human capital) =  (Pij).(%WHCijk);
for (i = 1,nBAP; j = 1,nSAP; k = 1,nIndicators).
77
. P_PCt (total priority associated to process capital) =  (Pij).(%WPCijk);
for (i = 1,nBAP; j = 1,nSAP; k = 1,nIndicators).
. P_RCt (total priority associated to relationship capital) =  (Pij).
(%WRCijk); for (i = 1,nBAP; j = 1,nSAP; k = 1,nIndicators).
. P_IVCt (total priority associated to innovation capital) =  (Pij).
(%WIVCijk); for (i = 1,nBAP; j = 1,nSAP; k = 1,nIndicators).
Then, the intellectual capital rating for this specific year (ICt) can be calculated
as:
ICt = (HCt . P_HCt + PCt . P_PCt + RCt . P_RCt + IVCt . P_IVCt)/(P_HCt +
P_PCt + P_RCt + P_IVCt)
A case study in the magnesium industry
In order to verify how the proposed model works in the real world, a case study
where the frame is applied is analysed. In this case the market and book values
of the selected company (M/B ratio) are analysed from 1995 to 1998 vis-aÁ-vis its
intellectual capital ratings and its component values as well as the company's
business strategy. Some very important conclusions are drawn from these
comparisons. Despite the fact that it is a mature industry, the magnesium
sector depends heavily on innovation and, by consequence, on human capital,
as new processes must be developed through the heavy use of technology. It is
also an industry that depends strongly on energy and must harness its
environmental impacts. Hence, despite not being a knowledge-intensive industry
such as those involved in information technology and telecommunications, some
companies continue striving to develop new knowledge from that already
deployed ± the main characteristic of the knowledge economy.
The analysed company, given the fictitious name MAGNEX here, has had a
market share of a steady 15 per cent, below two other companies with 37 per
cent and 16 per cent of the market respectively. Its main products are ingots,
powder, sheet and plate extrusions, and cast anodes. MAGNEX has invested
heavily in the improvement of its process technology, in order to make the
electrolytic cell increase productivity and reduce costs. The growth of the
magnesium market has been around 6 per cent per annum due to lower relative
costs of magnesium compared to aluminium and other metals.

MAGNEX's business strategy

Using the industry attractiveness and business strength framework along with
the environmental scan and internal scrutiny model (Hax and Majluf, 1991), as
JIC well as Ansoff's (1987) alternative growth strategy, a business strategy was
1,1 formulated as shown below:
. Mission statement:
To produce competitively high-quality products and sell the products on a world-wide
basis. Marketing in conjunction with R&D will develop additional products and
markets with improved price elasticity characteristics and market scope to achieve
78 future improved and sustainable profitability.
. Action programmes. The following broad and specific action
programmes were formulated, as well as their respective priorities for
the company (see Table III).
The application of the proposed framework presented in Table III, linking
MAGNEX's business strategy and its intellectual capital and correlated
aspects, leads us to Table IV.
After some computer calculations, using a specially developed software,
named ICR, the intellectual capital rating and that of its components can be
presented (Table V) and also compared with the M/B values over the course
of time (1995-1998) through statistical correlation analysis (Table VI and
Figure 4).
A detailed chart of the intellectual capital ratings is presented in Figure 5, as
well as a graph depicting the M/B evolution over the course of time (Figure 6),
in order to compare the results.

Analysis of the results

As shown earlier, measuring the intellectual capital is only worth quantifying if
there is any link to the company's shareholder value. It is also meaningless to
obtain absolute values; rather it is the variations over the course of time that
can lead us to draw some conclusions concerning the firm's strategy.

Broad action programmes Specific action programmes Priority

Achieve low-cost production Technology gains in the process Highly desirable

(weight = 2)
Methods and functions gains in Desirable
efficiency (weight = 1)

Magnesium market Market penetration Absolutely first priority

development (weight = 3)
Market development Highly desirable
(weight = 2)

Assure future business Energy sustainability Highly desirable

Table III. position (weight = 2)
MAGNEX's action Reduction of environmental Highly desirable
programmes impacts (weight = 2)
Broad action Specific action 95 96 97 98
programmes programmes Priority Indicators (%) (%) (%) (%) HC PC RC IVC

Achieve low-cost Technology gains Highly (Total costs ± energy cost)/total costs 50 45 42 40 0 0.2 0 0
production in the process desirable (Total costs ± maintenance cost)/total costs 92 90 89 88 0 0.1 0 0
(weight = 2) Productivity/max. market prod. 80 78 70 60 0 0.2 0 0
R&D invest./total revenue (process) 2 3 6 8 0 0 0 0.35
PhD employees (process)/total 5 2 8 10 0.1 0 0 0.15
Methods and Desirable Training days/total working days 20 10 32 38 0.25 0 0 0.05
functions gains (weight = 1) 100 ± annual turnover 88 75 95 95 0.1 0 0 0.05
in efficiency IT expenses/total expenses 14 15 8 5 0 0.1 0 0.05
Training invest./total revenue 3 4 6 9 0.25 0.1 0 0.05
TQM literacy 18 19 20 25 0.1 0.15 0 0
IT literacy 20 20 24 28 0.1 0.15 0 0.05

Magnesium Market Absolutely Market-share 30 25 20 10 0 0 0.15 0

market penetration first priority Converted bids/total bids 10 10 8 5 0 0 0.05 0
development (weight = 3) % working days at potential clients 15 18 15 10 0 0 0.1 0
% working days at current clients 10 8 6 5 0 0 0.05 0
% working days clients at firm 5 4 2 1 0 0 0.05 0
Market Highly % field salespeople 22 20 19 18 0 0 0.05 0
development desirable Invest. advertisement/total revenue 6 5 5 5 0 0 0.05 0
(weight = 2)

Assure future Energy Highly % contracts energy (short-term/total) 50 50 40 30 0 0 0.25 0

business position sustainability desirable % contracts energy (long-term/total) 10 12 10 5 0 0 0.25 0
(weight = 2)
Reduction of Highly R&D invest./total revenue (environment) 1 1 2 3 0 0 0 0.2
environmental desirable PhD employees (environment)/total 2 1 2 5 0.1 0 0 0.05
impacts (weight = 2)
MAGNEX's intellectual

corporate assets

Measuring
intangible
Table IV.
capital

79
JIC Intangible capital 95 96 97 98
1,1 Human capital 19.05 15.2 24.4 28.05
Process capital 42.6 41.35 39.3 38.15
Relationship capital 23.65 23.4 19 12.95
Innovation capital 9 7.8 12.05 13.9
80 Intellectual capital 24.37 23.02 23.45 21.94
Market value ($m) 1595 1271 780 479
Table V.
Book value ($m) 531 531 463 375
MAGNEX's intangible
capital and M/B values M/B 3.00 2.39 1.68 1.28

Intangible capital Correlation with M/B

Human capital ±0.817457463

Process capital 0.997180436
Relationship capital 0.914158532
Table VI.
Innovation capital ±0.872474956
Statistical correlation
analysis Intellectual capital 0.837829225

CORRELATION WITH MARKET VALUE (1994-1998)

1
Key
0.8 HUMAN CAPITAL
0.6 PROCESS CAPITAL
0.4 RELATIONSHIP CAPITAL
INNOVATION CAPITAL
0.2
INTELLECTUAL CAPITAL
0
–0.2
–0.4
Figure 4.
Statistical correlation: –0.6
intangible capital 6 –0.8
M/B values
–1

Regarding MAGNEX, it can be seen that there is a good correlation between

the intellectual capital ratings and the M/B values, partly due to the inclusion of
the action programme priorities, frequently disregarded by other models.
Rather than calculate intellectual capital by the mean average of the other
capital ratings as proposed by Edvinsson and Malone (1997), the influence of
 INTELLECTUAL CAPITAL
Measuring
50
HUMAN CAPITAL
intangible
corporate assets
40
PROCESS
30 CAPITAL
81
RELATIONSHIP
20 CAPITAL

10 INNOVATION
CAPITAL
YEAR Figure 5.
0
INTELLECTUAL MAGNEX's intellectual
95 96 97 98 CAPITAL capital rating

MARKET/BOOK VALUES

4.00
3.00
M/B

2.00
1.00
0.00
95 96 97 98
Figure 6.
YEAR
MAGNEX's M/B values

the priorities is paramount in obtaining a good statistical correlation. If

Edvinsson and Malone's (1997) methodology were used, the following
intellectual capital ratings and correlation would have resulted (Table VII).

The ``time-lag trap''

The correct understanding of the difference between knowledge stock and
knowledge flow is vital to the perception of what is happening in a firm.
Regarding MAGNEX, it can be concluded that, despite the considerable
investments in human and innovation capitals, the process and relationship
capitals undermined the intellectual capital rating as a whole. This behaviour is
far from rare. Usually some trade-offs are made leading to results differing
from those forecast. This lack of investment in the development of more

Intellectual capital 1995 1996 1997 1998 Correlation

Edvinsson and Malone 23.57 21.94 23.69 23.26 ±0.206 Table VII.
Statistical correlation
This model 24.37 23.02 23.45 21.94 0.838 comparison
JIC efficient and effective internal processes plus a disregard for the players
1,1 involved with MAGNEX (customers, suppliers, banks, etc.) jeopardised the
intellectual capital score. In addition, the effects of heavy investments in human
and innovation capitals take a while to be fully implemented and felt, i.e. there
is a kind of ``active inertia'' (Sull, 1999) that delays total and immediate
deployment of the benefits derived from them. The influence of either a high or a
82 low score with regard to relationship and process capitals is quickly perceived
by the market, whereas the human and innovation capitals, as sources of
innovation, demand time to produce results: a phenomenon we name ``time-lag
trap''. A dynamic model that takes into account this asynchronous effect must
be developed, as most research in progress to assess intangible capital does not
take the time factor into account as a truly important parameter. Then, the
same objections made to the traditional accounting methods can be applied to
the newly developed methodologies to measure intellectual capital. Time is
paramount and must be considered in future research. As an example, we
present the market value of MAGNEX for 1999 (July) in Figure 7, where it is
possible to see that the human and innovation capital benefits have been
already perceived by the stock market, leveraging MAGNEX's market value.

Conclusion
The intangible asset is the core of the knowledge economy. The current balance
sheet and income statement are able to present an X-ray of a firm, i.e. how it is
today, but are not reliable tools to perceive its performance in the very near
future. As Stewart (1997) says, accountants are unable to measure the
intellectual capital of a company. And this hidden treasure is today what really
matters in a society in constant turmoil. Knowledge has substituted land,
labour and capital as the input of knowledge-intensive companies. Despite the
advances made in understanding the nature of knowledge ± both tacit and
explicit ± and its transfer mechanisms within a company (Nonaka and
Takeuchi, 1995) and among their partners (Badaracco, 1991), a long and
arduous road still needs to be negotiated before we have reliable measurements
for this intangible capital. According to Prusak (1997) the globalisation of the
economy; the value of specialised knowledge; the awareness of knowledge as a
distinct factor in production; and cheap networked computing are the main
facets which are the driving forces behind this revolution.

MARKET/BOOK VALUE

4
3
M/B

2
1
Figure 7. 0
MAGNEX's M/B value: 95 96 97 98 99
July of 1999
YEAR
The conclusions on this subject allow us to adapt the economic concept of price Measuring
elasticity to this realm. Intellectual capital elasticity ("IC) can be defined. This intangible
concept can be presented as "IC = [d(M/B)/dt]/(dIC/dt) or, using a discrete corporate assets
definition, as "IC = [
(M/B/
t]/(
IC/
t), i.e. this elasticity shows the influence
in a company's market/book value when some changes are made in its
intellectual capital. By the same token, other elasticities can be also ascribed to
the other aspects involved in Intellectual capital such as, for instance, human 83
capital elasticity ("HC). Once again, the ``time-lag trap'' may influence this
parameter, due to an asynchronous effect as this elasticity may have to be
calculated for values occurring at different moments.
Another very important facet to be further researched is the corporate
knowledge depreciation process. Argote et al. (1998) suggest that there is a
substantial component of organisational knowledge that depreciates rapidly
and indicates that more research is necessary to identify the factors affecting
the rate of learning and ``forgetting'' in organisations. Yelle (1979) also indicates
that identifying factors favouring an accelerated rate of learning is a promising
area of future research. This comprehension can surpass the ``time-lag trap''
and allow investments on training and innovation to lead to better and quicker
results than those achieved today. Finally, more research is still needed to
understand the ``time-lag trap'' among different industries, both the
technologically mature and the knowledge-intensive industries. Research may
lead to the harnessing of the ``time-lag trap'' in the former, where its impact
seems to be stronger.
As we saw here, a heuristic frame was presented in this paper which tallied
closely with an actual case study, though more research is still needed in this
very important and recent field, in order to develop a new mental model to
better understand the overall value of an enterprise.

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