Intellectual capital in the new Internet economy – Its meaning, measurement and management for enhancing quality
| Date | 01 December 2000 |
| DOI | https://doi.org/10.1108/14691930010359216 |
| Pages | 296-312 |
| Published date | 01 December 2000 |
| Author | Ray F. Carroll,Richard R. Tansey |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
JIC
1,4
296
Journal of Intellectual Capital,
Vol. 1 No. 4, 2000, pp. 296-311.
#MCB University Press, 1469-1930
Intellectual capital in the new
Internet economy
Its meaning, measurement and
management for enhancing quality
Ray F. Carroll and Richard R. Tansey
Hong Kong Baptist University, Hong Kong
Keywords Intellectual capital, Intangible assets, Performance measurement,
Quality management, Valuation
Abstract Intellectual capital is the cornerstone of corporate success in the new economy. This
article will discuss the meaning, measurement, and management of intellectual capital.It discusses
the forces driving the concern about intellectual capital and how one company, Intel Corporation,
has been able to manage intellectual capital to achieve market dominance. Unlike Philip Morris,
Coca-Cola or McDonald's, which earn hundreds of millions year-in and year-out from the same
product lines, technology companies must constantly reinvent themselves. Intel has managed to do
this, but it is the exception.
Current intellectual capital definitions
This is the age of the intellect. New economy companies must be agile, rapidly
introducing new wave after new wave of products into rapidly changing global
markets. Success requires intellectual capital (IC) and the ability to manage this
scarce resource. The USA captured the market for memory chips in the 1980s
because it was better than its Japanese rivals at leveraging its intellectual
capital. Unlike the Japanese who were unable to market semi-conductor goods
effectively, US high tech firms such as Intel excelled at marketing. ``Intel
discovered the value of marketing in the late 1980s as it extended its dominance
in PC chips. Marketing will be critical to Intel's efforts to extend its influence''
(Brandt, 1993a, p. 54). In 1991 Intel's 486X chip brought mainframe computer
power to the masses and by 1993 the USA had become the low-cost producer
among major industrial nations. The importance of IC as a critical driver in the
competitive high tech sector is exemplified by the following quote:
I don't think anyone appreciated how fast Intel was going to throw new processors into the
hopper. You put out a product, and in six to nine months it has to be replaced. It's hard for a
company of any size to keep up (Pitta, 1992).
This paper is about intellectual capital, its creation and maintenance in the
global corporate context. We use accounting concepts to create a structure and
then reference Intel Corp. to illustrate our findings. We chose Intel because this
company has reinvented itself three times since its inception in 1968. First its
core business was making memory chips, then in the early 1980s it exited
memory chips to focus on micro processors. Recently since the mid-1990s it has
been in the process of building a new global Internet structure.
The current issue and full text archive of this journal is available at
http://www.emerald-library.com
The new
Internet
economy
297
Legal perspective
Intellectual capital is typically defined as intellectual property rights (IP).
Intangible assets, i.e. patents, trademarks, and copyrights, come to mind. IP
rights are recognized for accounting purposes because an objective value can
be attached to their costs based on actual market transactions. In a competitive
market the cost of a tangible asset is equal to the present value of the future
benefits expected from the asset's lifetime use. No such relationship exists for
IP rights. A patent is booked at its registration cost which may be a mere
fraction of the cash flows actually generated from patent protection. Intel's fee,
for example for developing its initial random logic micro-processor chips, was
fixed at $60,000 but the value of new product markets created by the
microprocessor is estimated at over $500bn a year (Manner, 1996).
Unrecorded intangibles
IC is commonly defined as intangible assets not frequently recorded on the
balance sheet, such as employee skills, R&D, internally generated goodwill,
brands, licensing opportunities, and innovative use of customer databases and
relationships along the supply value chain. A major source of unrecorded
intangibles is individual personality. Personality is the confluence of genetics,
environment and personal traits and experiences (Koselka and Shook, 1997).
Unrecorded intangibles help shape the assets that are recorded. For example
architectural design of new corporate headquarterscan reflect the personality and
cultureof companies of Silicon Valleycompanies such asIntel (Plotnikoff,2000).
Accounting perspective of knowledge based assets
The Society of Management Accountants of Canada (1998) has defined IC in
terms of assets as follows:
In balance sheet terms, intellectual assets are those knowledge-based items, that a company
owns which will produce a future stream of benefits for the company. This can include
technology, management and consulting processes and patented intellectual property.
In Fortune, Thomas Stewart (1994) defined IC as intellectual material that has
been formalized, captured and leveraged to produce higher-valued assets. A
popular way for accountants to define IC is as the difference between market
value and book value. According to Baruch Lev (1997) of NYU the market-to-
book ratio of the S&P 500 was about 1:1 in the manufacturing economy of the
1970s. In the current knowledge-based economy it is about 6:1 on average and
about 15:1 for Intel and 25:1 for Microsoft. The accounting system is clearly not
accounting for intellectual capital, which for many firms is the largest and most
valuable asset. Consequently it may be difficult to analyze a company by
merely looking at its financial statements.
A corporate strategy perspective
IC is focused on four corporate knowledge phases beginning with its
acquisition, accumulation, transformation, and ending with its valuation. IC is
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