Intellectual Capital

Intellectual Capital and Knowledge Management

A term is best defined by its use, and therefore it is – at the moment – probably correct to regard Intellectual Capital (IC) and Knowledge Management (KM) as twins – two branches of the same tree.

If we are looking for differences they can be found in how the words trigger off different connotations: IC is static and needs a verb to describe what managers can do with it: like managing IC or improving IC. KM is already active, in that it contains a verb. However, Management of Knowledge is very abstract and the notion that knowledge can be “managed” is close to an oxymoron, These are two reasons why I prefer to define KM as: The art of creating value from an organisation’s Intangible Assets. (Read more about Knowledge Management)

The first use of the term “Intellectual Capital” is (GR Feiwel The Intellectual Capital of Michael Kalecki, 1975) attributed to John Kenneth Galbraith, who in a letter to economist Michael Kalecki 1969 wrote:
I wonder if you realize how much those of us in the world around have owed to the intellectual capital you have provided over these past decades.

In 1991 Tom Stewart Fortune defines IC as:
the sum of everything the people of the company know which gives a competitive advantage in the market.
The early use of the term is thus to describe the dynamic effects of individuals´ intellect. When managers and consultants use the term, it becomes more organizational:

Leif Edvinsson, Skandia, and Pat Sullivan define it in European Management Journal (1996 vol 14) as: Knowledge that can be converted into value.

And in Laurence Prusak´s, Ernst & Young definition becomes even more “packaged”. He defines it in Klein & Prusak 1994, Characterizing Intellectual Capital, as: Intellectual material that has been formalized, captured and leveraged to produce a higher-valued asset.

Both Skandia and Ernst & Young emphasize the static properties of knowledge, that is: inventions, ideas, computer programs, patents, etc., as Intellectual Capital. Edvinsson & Sullivan also include human resources, Human Capital, but emphasize (ibid. p358) that: it is clearly to the advantage of the knowledge firm to transform the innovations produced by its human resource into intellectual assets, to which the firm can assert rights of ownership. One major task of IC managers is to transform human resource into intellectual assets.

Depending on how they understand what knowledge is and their aims both IC and KM actors therefore emphasize either the static or the dynamic properties of knowledge.

Skandia’s taxonomy for IC is basically the same as in the Intangible Assets Monitor, because they are from the same origins, (read more about the Swedish origins), but Skandia has grouped them slightly differently and added more detail.