Free Book Summary : Making Sense of Intellectual Capital This article is based on the following book: Designing a Method for the Valuation of Intangibles By Daniel Andriessen Published by Elsevier Butterworth-Heinemann, 2004 ISBN 0-7506-7774-0 408 pages

Intangible Perspective: An Overview

Recent developments in business and in the market have pushed businesses to re-examine the rudimentary components of their enterprise and identify what their “edge” is against the other players.  That “edge” transcends the tangible material and structural infrastructure that enable companies to function, and instead emphasizes what they know and how they (should) use that knowledge as a strategic advantage.

The Rise of the Information Economy

The term “information economy” exemplifies the prominence of information as an economic good crucial to the majority of operations and activities carried out today in business and other organizational contexts. Knowledge became a decisive factor for survival.  

Three Tongues, One Mouth: Defining Intangible Resources

Intellectual capital has encapsulated an organization’s non-monetary sources of wealth creation. Significantly, the word capital indicates that intellectual capital has value, and as such, can be measured and managed.

From the Accounting profession, the term intangible assets is introduced. This does away with the purely brain-based capabilities of an organization. The International Accounting Standards Board defines it as “an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes (IASC, 1998).

Lastly, central to human resources practitioners is the term itself - human resources - the workforce of the company. Some exploit the term “human assets” to accentuate the fact the people are indispensable sources of wealth and competitive advantage in an organization.

On All Fours: Determining Value and Methods for Valuation of Intangibles

4 Ways to Determine Value:

• Financial Valuation - the criterion of value is in monetary terms
• Value Measurement - makes use of a non-monetary criterion and translating it into observable phenomena
• Value Assessment - criterion cannot be translated into observable phenomena and instead depends on personal judgment by the evaluator
• Measurement - does not include a criterion for value but involves a metric scale that relates to observable phenomenon

The Snags of Intangible Valuation

Most scholars of the Intangible Perspective consider the valuation of intangible resources troublesome.  Problems could be categorized into three areas:

• What do we measure?
• Why do we measure?
• How do we measure?

Getting Into the Grind: Coming to Grips with Intellectual Capital

The author’s scientific journey into management research begins with drafting a new method for the valuation of intangible resources in a manner that resolves the problem of how to determine the value of intangibles and how this could improve organization performance.

Adopting Van Aken’s (2000) reflective cycle, a process for the scientific testing of practical propositions, the author started off with a set of distinctions to diagnose a class of situations and to define a class of problems. Subsequently, Aken designed a practical method to provide a general solution for the class of problems He then translated the method in the context of a specific organizational problem and ended with design knowledge for the solutions to the class of problems.

A Final Shot of Wisdom

The author held that the valuation of an organization’s intangible resources is still at its embryonic stage, yet breakthroughs are welcome. His intrepid shot at reconciling both the empirical and practical fringes of management research is a step further the trajectory of objective assessment of the weightless wealth that affords each company with a viable edge. His work proved that extracting value from intellectual capital calls for two things: first, an awareness of what these resources are and what they can do to lunge organizational success, followed by the necessary institutionalization of valuation processes that continue to monitor, evaluate, and make rectifications on the progress of core competencies vis-à-vis the organization’s employees, its supportive infrastructure, and its customer relations.

Daniel Andriessen is a Ph.D. graduate at the Nyenrode University and Senior Manager at KPMG Knowledge Advisory Services in the Netherlands.  He is the author of several books on Knowledge Management and Intellectual Capital, including “Weightless Wealth”, “The Knowledge Dividend” and “Value-Based Knowledge Management”.

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