Intellectual Capital. The future management focus

Feature

posted 1 Oct 1997 in Volume 1 Issue 2

Intellectual Capital. The future management focus

Leif Edvinsson, Director of Intellectual Capital, Skandia focuses on Intellectual Capital, a concept that is both broader than knowledge management and can be considered as more of a 'knowledge navigation' into unknown 'but necessary' actions for corporate survival and competitiveness.

The hidden capabilities

Just look at the stock exchange in New York. Today, in October 1997, the top five valued organizations have a value that, on average, is 13 times the book value. Microsoft and Coca Cola are being valued, respectively, 21 and 26 times over their book value. This is called either Tobins Q or Intellectual Capital ratio. It shows and quantifies the hidden and intangible capabilities of an organisation, which are usually not included in the traditionally accounted book value. Furthermore, it is an appreciation of the future earnings potential of the enterprise. According to research by Professor Baruch Lev of the Stern University, New York, this growing 'value gap' is a trend that has been escalating during the last 20 years.

A more refined distinction of this gap is described by the Skandia Value Scheme, which has been visualised in several publications from Skandia. It looks as below; It describes the major building blocks of intellectual capital. It starts by making a clarification that the hidden capabilities consist of more than just the human capital. This value gap includes what is left when people have gone home, the so-called structural capital. This includes, for example, organisational systems, trade marks, databases, patents and customer relationships.

From a management as well as a shareholder perspective the key focus should consequently be on these components of hidden capabilities for future earnings potential, i.e. the intellectual capital.

In Skandia this approach had already been inaugurated in 1991, when a Director of Intellectual Capital was appointed within the dynamic globally operating unit of Skandia, AFS-Assurance and Financial Services. Today, the whole Skandia Group is a Fortune 500 global company and is applying this management to an even greater degree. It is an approach that is evident for knowledge intensive service enterprises, that is based on intangibles. But it is applicable in most organizations as a model for extracting and creating value out of investments in knowledge and other intangibles.

Major steps

The Skandia approach can be summarised in the following major phases:

missionary; to articulate a deeper understanding of hidden capabilities, and their contribution to a greater future value to shareholders and other stake-holders alike, by a language and systematic taxonomy that helps to visualise the intangibles. This is also achieved by metaphors such as the knowledge tree, where the nourishment of the roots is considered more important for the future than the harvesting of the fruits for today.

measurement; to develop the metrics as a quantitative language to describe the position, evolution velocity and direction of the hidden capabilities - that is done by the reporting format called Skandia Navigator. This highlights four key focus areas to develop indicators for, in addition to the financial indicators, thereby giving a broader and more balanced management. It also includes the development and application of an IC-index"!. Every six months a public IC supplement is now published, in parallel to the financial reports.

leadership; to navigate the organisation and nourish the future earnings capabilities based on the indicators, reported through the IC Navigator. Today this is done within Skandia AFS electronically in a PC and Internet based model called Dolphin. The leadership will then be more focused on how to grow future earnings capabilities.

technology; to develop structural capital of human capabilities. This is one of the most essential multipliers for productivity. Technology helps to package, recycle, distribute and trade on human skill. From a knowledge management perspective this is sometimes limited to data warehousing, but it is much more. It is the tool for participating in the global digital economy.

capitalise; to look for the extraction as well as creation of value in the intangibles. This is often done within the Intellectual Property function, trading on patents, trademarks, copyright etc. But it is also to discover how to package the human capabilities into structural capital in order to trade on it, as well as to look for alliances with others to leverage their structural capital with our own human capital.

futurise; to amplify and embody the leadership and management efforts towards future capabilities. This is done within Skandia by the thrust on Skandia Future Centres. The theme is this: to turn the Future into an Asset.

Since the inauguration of the first Skandia Future Centre in Sweden in May 1996, it has attracted more than 5,000 visitors.

3 generations of IC

Today the leanings and development within Skandia can be represented by 3 generations of approaches:

1st generation: to visualise IC and hidden capabilities;
2nd generation: to measure and leverage IC;
3rd generation: to futures IC.

These generations are simultaneously refined and elaborated during their application within Skandia; this is a work in continuous progress. To some extent this is an application of knowledge management in practice. However, the emphasis is more on benchlearning and the stretching of known management practice beyond the contemporary and into how to nourish future earnings capabilities. Therefore, Intellectual Capital is a concept that is both broader than knowledge management and can be considered as more of a 'knowledge navigation' into unknown - but necessary - actions for corporate survival and competitiveness.

A quest not only to become a more knowledgeable but also a more intelligent enterprise.

Leif Edvinsson is the Director of Intellectual Capital at Skandia and a member of the Editorial Board of KM, as well as an author and acknowledged expert in the field of knowledge management. He can be contacted at:

edvlei@afs.skandia.se