Intangible Capital is the New Factory
July 21, 2010 by Mary Adams
The core of the tangible economy is the factory. Simply put, a factory is a building where production equipment converts raw material into finished goods. Companies make their money by selling these finished goods. The story of the tangible economy is the story of organizing and running these factories.
The modern knowledge business can also be understood as a factory, a place where the knowledge raw materials get put to work. This factory is where you create value for customers and make money. The story of the intangible economy is the story of organizing and running the knowledge factory in combination with physical processes.
The combination of all the intangibles in an organization is intangible capital (IC), sometimes also called intellectual capital. We see IC as a system which is what led us to the creation of the concept of the knowledge factory. By getting you to think of your knowledge assets—your intangible capital—as a factory, we want to get inside your head and change the way you think about your business—hopefully forever.
Don’t think about and manage human, relationship and structural capital as separate components. Manage them as a system. Think of yourself as head of the knowledge factory of your team, your division, your organization. Maximize the effectiveness of each by putting them to work in a powerful system that can’t be stopped.
Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.
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Hi Mary,
I am a new follower of your blogg and I have a question about your use of the term “Capital” as in Intangible/Intellectual Capital.
I this use, creates and perpetuates an error in the way we all talk about intangibles. More than just an exercise in semantics, distinguishing between intellectual capital, intellectual property and intellectual assets is critical to understanding the evolving world of intangibles.
For me, “assets” are resources controlled by an organization that can be used to produce a product or service; “property” is the legal rights that enable asset owners to maintain exclusive control over their assets; and “capital” is the stock of property that can be used to create surplus value in the future.
While the assets you are talking about in your blog are important for companies, they are not are certainly not capital in the true sense of the word, they are not even always property. They can for example not be used as collateral for a loan or packaged and sold as a security.
It would be interesting to hear your point of view in this discussion.
Thanks for a great blog!
Best regards,
Sebastian
Thanks Sebastian for your great question.
It is absolutely true that many intangibles are not owned or controlled by the companies that use them. This actually has a number of implications for management in the knowledge era (I have a post coming on this next week–this means that stakeholder management is more important than ever so that a company retains the “right” to use this resource).
So, while it is not “property,” intangible capital is indeed the set of resources that, in your words, “can be used to create surplus value in the future.”
There are two angles on the your question about intangibles as collateral.
First, as a former lender myself, I know that more and more loans today are actually “cash flow” loans (because of the lack of hard assets available as collateral). These cash flows are absolutely dependent on the intangible capital and what we call the knowledge factory. Both collateralized and cash flow loans should have an intangible capital analysis as part of the loan package.
Second, there are emerging markets for some forms of intellectual property which create more opportunities for lenders (trademarks, patents, etc.). I also think that over time, there will be new business models and loan opportunities around processes. Some day we will see knowledge processes in the same way that we see the machinery and processes on a factory floor.
Best regards, Mary
I agree with you that intangible capital is indeed a set of resources that “can be used to create surplus value in the future.”
My point is however, that not all assets here called intangible capital is capital in the true sense of the word. Some can’t even be claimed as property, and therefore never obtain the status of capital (e.g. business method in Europe). Some can be claimed as property but not converted to capital (a worthless patent).
The main reason why I think this distinction is critically important is because, as economists have recognized for centuries, capital is the engine that powers the market econom. The ability to convert assets (here called intangible capital) into capital may be, in fact, the primary determinant of national wealth.
I could strongly recommend you the highly influential book “The Mystery of Capital” by Hernando De Soto where he explains the process of capital creation (and also explains that the major cause of the disparity in wealth between rich nations and poor nations is the failure of capital formation in the developing world). From this, one could clearly draw the parallel that a company in the knowledge economy primary focus should not only be to “produce” intellectual assets, but also master the conversion of the assets into capital.
I hope you see my point and why the concept of “Intangible capital” can be both misleading but also confusing in the discussion. I know that “intellectual/intangible capital” is a widespread term used in dozens of books and articles over the past decade but I would argue that this is a rather unfortunate definition and hinders us from truly understanding the evolving world of intangibles.
Best regards, Sebastian
Sebastian-
I have not read De Soto’s work but have ordered it and look forward to reading it. It sounds like some of the concepts outlined in From Poverty to Prosperity where Kling and Schulz talk about “bugs” in the “software layer” of societies.
I guess I would like to hear your (or De Soto’s) definition of capital. Here’s the relevant part of the Merriam-Webster dictionary definition of capital:
One can have political capital, intangible capital, financial capital. All can contribute to the ability to generate income. A company does not necessarily have to own an asset to benefit from it. A company does not own its people but it has the rights to the value of their work within certain parameters. I absolutely agree that there needs to be focus on how to convert intangible capital into financial capital. But ignoring intangibles as part of the productive process seems to me to also be counterproductive.
What is your definition of capital? How should we talk about intangible drivers of income?
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