Internal Context and intangible Assets

The material is based on the Following Books

An Integrated Approach to strategic Management Hills and Jones Strategic Management Peter Fitzroy and James M Herbert

Strategic Management of Health Care Organizations Linda E. Swayne W. Jack Duncan and Peter M. Ginter
Marketing Strategy Walker Boyd Mullins Larreche Strategic Brand Management Kevin Lane Keller

We Live in a Strange Economy

Age 37 native of Michigan PhD at Stanford Larry Page

Age 37 native of Moscow

PhD at Stanford
Sergey Brin

Worth US$ 11,000,000,000 each

Source: Forbes.com

Every Company Is Like a Tree

That Is Best Viewed Upside Down

Intellectual Capital Is the Driver of Value

Companies

Tangible capital

Intellectual capital

Financial capital

Human Capital

Structural Capital

Relational Capital

MIT Has Knowledge

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural Capital

Relational Capital

Implicit knowledge

Explicit knowledge

Mckinsey Has Skilled Workers

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural Capital

Relational Capital

Implicit knowledge

Skills

Attitude

Reputation

Philips Has Intellectual Property

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural Capital

Relational Capital

Implicit knowledge

Skills

Attitude

Explicit knowledge

McDonalds Has Processes

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural capital

Relational capital

Implicit knowledge

Skills

Attitude

Explicit knowledge

Processes

GE Has Pride and Ambition

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural capital

Relational capital

Implicit knowledge

Skills

Attitude

Explicit knowledge

Processes

Culture

Nike Does Not Manufacture Shoes

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural capital

Relational capital

Implicit knowledge

Skills

Attitude

Explicit knowledge

Processes

Culture

Networks

Reputation

Rabobank Has Involved Customers

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural capital

Relational capital

Implicit knowledge

Skills

Attitude

Explicit knowledge

Processes

Culture

Networks

Reputation

Customer capital

Brand of the Year 2005

Source: Brandchannel.com

Four Duties of Management

Manage Intellectual Capital

Report Intellectual Capital

Intellectual capital
Human Capital Structural Capital Relational Capital

Protect Intellectual Capital

Make Money from Intellectual Capital

Manage Intellectual Capital

Intellectual capital
Human Capital
Structural Capital

Relational Capital

Managing Knowledge Professionals

Knowledge Management Intellectual Property Management

Brand Management Customer Relationship Management

Protect Intellectual Capital

Intellectual capital

Human Capital

Structural capital

Relational Capital

Confidentiality agreements Employee satisfaction

Protect Intellectual Capital

Intellectual capital

Human Capital

Structural Capital Patents Registered Designs Plant Varieties Design Rights Copyright

Relational Capital

Gravity powered shoe air conditioner US Patent No. 5,375,430

Protect Intellectual Capital

Intellectual capital

Human Capital

Structural Capital

Relational Capital

Trade Marks Domain Names

20/40

330 New Patents Filed Each Day

Companies Failing to Protect IC

Xerox failed to patent and exploit technology invented in its famous Palo Alto Research Centre. Among these inventions are: The Personal Computer that generated billions of dollars for many computer companies like Compaq Ethernet technology made 3Com famous The laser printer has made Hewlett Packard billions of dollars WYSIWIG has made Adobe a household name in type font software The GUI technology became the foundation for Apple computers Macintosh and Microsofts Windows Operating System

Companies Failing to Protect IC Kodak lost a billion-dollar patent (instant cameras) infringement
case to Polaroid by failure to assess properly the patent landscape before launching a major product-development effort.

$925 million in damages to Polaroid $1.5 billion because of shutting down manufacturing plant 700 plant workers to be laid off $500 million to buy back the 16 million instant cameras sold between 1976-1985 $100 million dollar to be paid in legal fees during the 14-year long battle $? To be written off at a total loss of R&D Effort and Investment

Companies That Made Money From IC

At IBM an IP management effort boosted annual patent licensing royalties from $300 million in 1990 to more than $1 billion today.

This was accomplished by aggressively licensing

technology and exploiting IP beyond core business operations, as well as licensing potential competitors in the PC hardware, semiconductors storage and software business.

Companies That Made Money From IC

Texas
Instruments began its patent licensing efforts in the mid-1980s when it faced bankruptcy. Since that time, it has

earned $4 billion in patent royalties and its current licensing

revenues are estimated to be in the neighbourhood of $800 million a year.

Companies That Made Money From IC

Coca-Cola generates approximately $500 million annually from its trademark-licensing program, at a profit margin about 80%. Coke has licensed its trademark for use in clothes and other personal items like playing cards. There are stores that specialize in selling Coke trademarked items.

Should IC be on the Balance sheet?

The system of double-entry bookkeeping is more than 500 years old. It was popularised by the Italian monk Luca Pacioli, and is based on transactions with 3rd parties.

A transaction, like the sale of a product, results in changes in the income statement and the balance sheet: sales revenue and cost of goods sold expense will rise, the inventory decreases and cash and owners equity increases.

IC only appears on the balance sheet when it is acquired (goodwill)

Three reasons NOT to put IC on balance sheet:

Not allowed
Only acquired IC can be put on balance sheet

Not possible
Intangible resources are no rival assets The value of intangibles can increase or decrease without any transaction taking
place

Intangible assets are impossible to count and keep a tally of

No need
Intention of Balance Sheet is NOT to represent the value of the company but to
match costs and revenues

External stakeholders not only use balance sheet to assess companies Current treatment of investments in IC as expenses leads to distortion in income
statement. However, distortion is often small compared with other distortions (e.g.
depreciation methods)

IC Monitor Our Intellectual Capital Monitor is based on an emerging standard

Human Capital Structural Capital Relational Capital

Investments

HCI

SCI

RCI

Assets

HCA

SCA

RCA

Effects

HCE

SCE

RCA

Human Capital
Public expenditure on education as a percentage of GDP (2001)
DK SE FI BE PT AT FR EURO-15 USA NL IT UK DE ES IE EL LU JP 0 1 2 3 3.91 3.85 3.57 4 5 6 7 8 9 5.09 5.08 4.99 4.98 4.69 4.57 4.41 4.35 6.24 6.12 5.9 5.79 5.73 7.31 8.5

Source: Eurostat Structural Indicators

Structural Capital
Gross domestic expenditure on R&D as a percentage of GDP (2001)
SE FI JP USA DE DK FR BE EURO-15 AT UK NL LU (2000) IE IT ES PT EL 0 0.5 0.64 1 1.5 2 2.5 3 3.5 4 4.5 1.17 1.11 0.95 0.85 1.71 1.98 1.9 1.89 1.89 2.51 2.4 2.23 2.17 2.72 3.07 3.41 4.27

Source: Eurostat, Structural indicators

IC Investments
DK SE FI BE DE FR NL AT UK IE PT LU IT ES EL EURO-15 JP USA 0.00 0.10 0.20 0.30 0.40 0.50 HCI SCI 0.60 0.70 0.80 0.90 1.00

32/40

IC Assets
SE DK FI UK IE AT NL BE DE FR LU ES PT EL IT EURO-15 JP USA 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80

HCA

SCA

RCA

33/40

IC Effects
DE LU UK NL DK SE FR IE FI BE AT IT ES EL PT EURO-15 JP USA 0.00 0.10 0.20 0.30 HCE SCE 0.40 RCE 0.50 0.60 0.70

34/40

Conclusions
1. Investments in IC pay off
We found a strong correlation between HCI and HCA (0.470) and between SCI and SCA (0.686)

2. HC and SC go together
HC and SC are interdependent and mutual enhancing factors

3. High value of IC assets is no guarantee for high productivity

Low value of IC assets do seem to be a guarantee for low intellectual productivity

4. Europa, compared to USA and Japan, has a long way to go

But is catching up.

Thank You! Dr. Daniel Andriessen Professor of Intellectual Capital INHOLLAND University of Professional Education Amsterdam/ Diemen The Netherlands +31-204951719