Value-Driven Intellectual Capital: How to Convert Intangible Corporate Assets into Market Value: 6 (Intellectual Property-General, Law, Accounting & Finance, Management, Licensing, Special Topics) - Hardcover

Sullivan, Patrick H.

Hardcover

ISBN 10: 0471351040 ISBN 13: 9780471351047

Publisher: Wiley, 2000

Synopsis

How do firms like Hewlett-Packard, DuPont, Dow Chemical, IBM, and Texas Instruments routinely convert the ideas of their employees into profits that sustain the corporation?

How can buyers and sellers calculate the assets of the acquired firm in a merger or acquisition?

How can an organization affect the firm's stock price using the leverage of intellectual assets?

Identifying a firm's assets, especially its intellectual assets-the proprietary knowledge expressed as a recipe, formula, trade secret, invention, program, or process-has become critical to a company's overall vision and strategic plan and essential in such transactions as stock offerings or mergers. In the era of the knowledge-based company, where the firm's genius and future lies in its ideas, a firm's collective know-how has become a measurable commodity-and as much a part of its bottom line as the condition of its cash investments, plant, and equipment. Extracting and measuring the real value of knowledge is essential for any corporate head who knows how high the stakes have become for corporate survival in the information age-where the innovative idea is as good as, if not better than, gold! Value-Driven Intellectual Capital is a corporate and financial executives' handbook to the new world of intangible assets-what they are and how to convert them into cash or strategic position. Written by one of the seminal thinkers in the field, and the key organizer of the ICM Gathering, a group of leading-edge knowledge-based companies, Value-Driven Intellectual Capital explains the new, boundary-expanding world of intellectual assets-where translating an innovative idea into bottom-line profits involves a tightly focused strategy with clear directives for making it happen. A blueprint for turning corporate knowledge, know-how, and intellectual property into a sustainable competitive weapon that will build a firm's reputation and market share, this practical, insightful book outlines:
* Basic concepts underlying IC (intellectual capital) and corporate value creation
* The linkage between IC, business strategy, and profits
* The different kinds of value-including qualitative and quantitative -firms realize from their IC
* Activities required to produce the value firms desire from their IC
* Methods for calculating the dollar value of companies-for market capitalization and mergers or acquisitions
* An economic model of an IC company

The book's appendix is a valuable distillation for corporate and financial executives, managers, researchers, and analysts of IC's basic working concepts and definitions, including the principles underlying value creation and value extraction, the concepts and strategies used by successful companies, the sources of value for knowledge companies, and the mechanisms used to convert that value into real profits. And since it is managerial talent that turns intellectual property into business assets, the book provides an arsenal of key concepts, methods, and processes for aligning with and using intellectual property as an active element of a firm's business strategies. It concludes with a discussion of how value is extracted from human capital, focusing on its elusive magnetic core: creativity and productivity. In an era in which firms are increasingly accountable to shareholders and success is judged solely by stock price, knowing how to measure and extract the value of a firm's intellectual assets has become one of the most critical and essential skills needed by CEOs today. Reflecting the most innovative thinking from some of the most sophisticated firms in the world, Sullivan's Value-Driven Intellectual Capital is a manifesto, a clarion call to excellence for any corporate or financial executive, merger and acquisition partner or investor who understands how much future corporate survival and success depends on the simple enduring genius of a good idea and the need to convert those ideas into corporate value.

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About this title

About the Author

PATRICK H. SULLIVAN (psullivan@icmgroup.com) is an expert at creating profits from intellectual assets and is considered one of the leading conceptual thinkers in extracting value from intellectual capital. He is a founding partner of the ICM Group, a Palo Alto, California-based consulting company focused on managing intellectual capital to maximize value. He is also cofounder of the ICM Gathering, composed of managers of intellectual capital for large, diverse international companies who meet to exchange information on new and innovative management techniques.
He is a frequent speaker on a range of topics concerning the management of intellectual capital including stock value, licensing, and developing profits from IC. He is a member of the Licensing Executives Society (where he was the founding chairman of its Intellectual Capital Management Committee), the World Intellectual Property Trade Forum, and the American Bar Association Intellectual Property Licensing Section, and a fellow of the American Council on Education. He is a frequent contributor of articles on intellectual capital management for leading journals, the author of Profiting from Intellectual Capital, and the coauthor of Technology Licensing: Corporate Strategies for Maximizing Value, both published by Wiley.

From the Inside Flap

How do firms like Hewlett-Packard, Du Pont, Dow Chemical, IBM, and Texas Instruments routinely convert the ideas of their employees into profits that sustain the corporation? How can buyers and sellers calculate the assets of the acquired firm in a merger or acquisition? How can an organization affect the firm's stock price using the leverage of intellectual assets? Identifying a firm's assets, especially its intellectual assets-the proprietary knowledge expressed as a recipe, formula, trade secret, invention, program, or process-has become critical to a company's overall vision and strategic plan and essential in such transactions as stock offerings or mergers. In the era of the knowledge-based company, where the firm's genius and future lies in its ideas, a firm's collective know-how has become a measurable commodity-and as much a part of its bottom line as the condition of its cash investments, plant, and equipment. Extracting and measuring the real value of knowledge is essential for any corporate head who knows how high the stakes have become for corporate survival in the information age-where the innovative idea is as good as, if not better than, gold! Value-Driven Intellectual Capital is a corporate and financial executives' handbook to the new world of intangible assets-what they are and how to convert them into cash or strategic position. Written by one of the seminal thinkers in the field, and the key organizer of the ICM Gathering, a group of leading-edge knowledge-based companies, Value-Driven Intellectual Capital explains the new, boundary-expanding world of intellectual assets-where translating an innovative idea into bottom-line profits involves a tightly focused strategy with clear directives for making it happen. A blueprint for turning corporate knowledge, know-how, and intellectual property into a sustainable competitive weapon that will build a firm's reputation and market share, this practical, insightful book outlines:Basic concepts underlying IC (intellectual capital) and corporate value creation
* The linkage between IC, business strategy, and profits
* The different kinds of value-including qualitative and quantitative-firms realize from their IC
* Activities required to produce the value firms desire from their IC
* Methods for calculating the dollar value of companies-for market capitalization and mergers or acquisitions
* An economic model of an IC company
The book's appendix is a valuable distillation for corporate and financial executives, managers, researchers, and analysts of IC's basic working concepts and definitions, including the principles underlying value creation and value extraction, the concepts and strategies used by successful companies, the sources of value for knowledge companies, and the mechanisms used to convert that value into real profits. And since it is managerial talent that turns intellectual property into business assets, the book provides an arsenal of key concepts, methods, and processes for aligning with and using intellectual property as an active element of a firm's business strategies. It concludes with a discussion of how value is extracted from human capital, focusing on its elusive magnetic core: creativity and productivity. In an era in which firms are increasingly accountable to shareholders and success is judged solely by stock price, knowing how to measure and extract the value of a firm's intellectual assets has become one of the most critical and essential skills needed by CEOs today. Reflecting the most innovative thinking from some of the most sophisticated firms in the world, Sullivan's Value-Driven Intellectual Capital is a manifesto, a clarion call to excellence for any corporate or financial executive, merger and acquisition partner or investor who understands how much future corporate survival and success depends on the simple enduring genius of a good idea and the need to convert those ideas into corporate value.

Excerpt. © Reprinted by permission. All rights reserved.

Value-Driven Intellectual Capital

How to Convert Intangible Corporate Assets into Market Value

By Patrick H. Sullivan

John Wiley & Sons

Copyright © 2000 John Wiley & Sons, Ltd
All rights reserved.

ISBN: 978-0-471-35104-7

CHAPTER 1

Introduction

Intellectual capital exploded onto the business scene in the1990s. When Fortune magazine published Tom Stewart'sarticle "Brainpower," in 1991, it was the first article on thetopic to appear in a national business magazine. By 1998, anumber of books and dozens of articles in professional journalsand trade magazines were devoted to the topic, to say nothingof significant coverage in the popular business magazines suchas Fortune and Forbes. In 1999 alone, over a dozen conferenceswere held around the world on intellectual capital managementin one form or another.

In 1999, CEO Magazine and Arthur Andersen hosted aroundtable luncheon for chief executive officers (CEOs) interestedin discussing intellectual capital (IC) and its impact onthe firm as we know it. The luncheon drew 17 CEOs representingboth manufacturing and service industry companies. Allwere intrigued by the potential hidden value that the intellectualcapital perspective suggests lies untapped within their businesses,but none knew what kinds of value they could obtainfrom their company's intangible assets or how they might goabout it. They just knew that there was hidden value in theircompanies and that it was somehow wrapped up in the thoughts,skills, innovations, and abilities of their employees. Theywanted to learn more about this value: how to harness it, directit, and extract value from it.

This book is written for those CEOs and for anyone else whowants to know how to extract the hidden value that resideswithin the firm's intellectual capital. As of this writing dozensof firms actively engage in extracting value from their IC. Thepeople directing the activities for these firms have formed acommunity (called the ICM Gathering) to share their ideas andsuccess stories. With the exception of a very few proprietarybits of information that could be useful to competitors, thesefirms are willing to share their knowledge, and this book drawsheavily on their experiences. The purpose of this book is tohelp businesses profit from one of their most important assets,their intellectual capital.

WHAT IS INTELLECTUAL CAPITAL?

The idea of capital as a euphemism for a strategic businessasset is not new. Economists frequently describe the basicresources necessary for an industrial enterprise in terms of thethree classic kinds of assets: land, labor, and capital (here capitalrefers to financial and other economic assets). But the ideaof intellectual capital is a new one; it brings to the foregroundthe brainpower assets of the organization, recognizing them ashaving a degree of importance comparable to the traditionalland, labor, and tangible assets.

If a survey were conducted, there would be agreement thatmany modern companies are filled with intellectual capital: lawfirms, consulting firms, software companies, computer companiesto name but a few. But if the survey went on to ask peopleto define what intellectual capital is, there would be a widerange of answers. These answers would not converge ontoone simple definition of intellectual capital, but rather on many.The range of views and the number of terms used to describeand define intellectual capital are broad, without a clear focus,and often confusing. Some of the same terms appear in many ofthe definitions yet seem to have different meanings in each.For example, the following list of "capitals" is frequently, anddifferently, used in descriptions or definitions of intellectualcapital: human capital, customer capital, stakeholder capital, culturalcapital, relationship capital, organizational capital, structuralcapital, process capital, and economic capital.

In contrast to the list of confusing and ever-changing types ofcapital, there is substantial agreement on the activities and elementsthat constitute the capital of interest here: intellectualcapital. Picture the elements of IC as balloons in a pile. Theymight look like Exhibit 1.1. If the balloons were piled on thefloor of a room, each observer in a different part of the roomwould have a different perspective on intellectual capital.Someone interested in knowledge or knowledge managementwould see one face of the pile. From another perspective, theelements of intellectual capital would present a different face.

The diversity of opinion on just exactly what intellectualcapital is results from the wide range of interests and perspectiveson the subject. Each definition is consistent with theperspective and interests of its users and understandably oftenneglects or ignores the interests or perspectives of others. Theusers of intellectual capital tend to fall into several groups aslisted below, each with strongly held and sometimes vehementlydefended points of view.

• Knowledge and learning. People with these interests tendto see human capital and the tacit components of intellectualcapital in the foreground. They are concerned primarilywith the creation of new or more knowledge andmethods and environments in which creative processescan be most productive.

• Knowledge management. This term is often used as a synonymfor computer-based information systems. Peoplewith this area of interest concern themselves with the identificationof data or information, where it resides, where itneeds to be, and how to get it from point A to point B inthe most efficient manner.

• Innovation management. This term is sometimes used todescribe the management of research and development(R&D). People with this interest focus on how to improvethe efficiency and effectiveness with which ideas are generatedand screened to identify those of greatest interest orvalue to the organization.

• Capital markets. People with an interest in capital marketssee intellectual capital as a business asset and are concernedwith the amount of a firm's intellectual capital,how it is valued, how its value affects the company balancesheet, and how to provide value information to currentand potential stockholders.

• Shareholders. People in this group have a financial interestin a business enterprise. They see the firm's intellectualcapital as a business asset and are interested in boththe amount and the use of a firm's intellectual capital.Their interest usually centers on how the intellectual capitalcan be focused and leveraged to improve profitabilityor strategic positioning.

• Company managers. These are the people who managethe firm's intellectual capital. They, too, see it as a businessasset, but their focus is on how to manage it in orderto increase both its amount and, more important, its abilityto increase cash flow. Company managers involvedwith intellectual capital are most often focused on creatingthe firm's future cash flow, economic profit, and sustainablecompetitive advantage.

Exhibit 1.2 illustrates how the view of IC from different perspectivesresults in different elements appearing in the foregroundand background of each view.

HOW DOES IC BRING VALUE TO A FIRM?

Once a firm understands that it has intellectual capital, howdoes it convert it into something of value? The answer is that itdepends! For example, to a company's chief financial officersomething is valuable to the extent that it has a positive effecton the firm's financial statement. CFOs tend to ask how muchrevenue or profit this "IC stuff" generates on a sustained basis.In contrast, a marketing executive may find the strategic positioningmade possible by the firm's IC to be valuable. At arecent meeting of the ICM Gathering, member companies, allsophisticated in extracting value from their intellectual capital,were asked to describe how their firms had received value fromtheir intellectual assets. The list that follows shows theirresponse.

Profit Generation
Income from products or services, through:
sale
licensing royalties
joint venture income
strategic alliance income
Income from patents, through:
sale
licensing royalties
joint venture income
donation (tax write-off)
Price premiums
Increase in sales, through:
convoyed sales

Strategic Positioning
Market share
Leadership (innovation, technology, etc.)
Standard-setting
Name recognition, through:
branding
trademarking
reputation
Acquiring innovations of others
Customer loyalty
Cost reductions
Improved productivity
Repeat sales
Long-term sales

On average, each of these companies was receiving four orfive kinds of value from its intellectual capital. The value manyof these firms receive from their IC is the result of a well-reasoned,well-planned, and well-executed set of managementinitiatives designed to ensure that specific forms of valuedeemed important to the business strategy are routinelyextracted from the firm's intellectual capital.

STRATEGY AND ITS EFFECT ON VALUE

Different kinds of firms use different strategies to obtain differentmixes of value from their intellectual capital. Firms thatsell physical products often protect their product innovations bypatenting them. The profits of these firms derive from the saleof differentiable products. In other words, they seek innovationsfrom their human capital that will make the company'sproducts different from those of their competitors and attractiveto customers. Such firms are likely to seek value from their ICin the form of income from product sales. They may also beexpected to seek value in the form of strategic positioning,specifically by creating a reputation or image and using it togenerate customer loyalty.

Other kinds of firms profit by selling the knowledge of theirhuman capital. Consulting firms, accounting firms, and lawfirms are examples. The value these firms can expect to obtainfrom their intellectual capital is in the fees they receive for servicesprovided to their clients. In addition to income for servicesprovided, these firms may also seek value in the form ofreputation or image. The fundamental nature and functions of afirm may be a primary determinant of its strategy and the kindof value it can and should extract from its intellectual capital.The point can be illustrated by a description of four differentkinds of firms.

1. Differentiated products company. This type of companyearns its profits from the sale of differentiable products.Companies in this category sell products in a retail environment.Hewlett-Packard is a good example of this kindof company because its profits derive from product salesand its IC focuses on product innovations that allow it tocharge a premium price.

2. Commodity products company. This type of companyearns its profits from the sale of commodity products, forexample bulk chemical manufacturers. Such firms selltonnage of commodity chemicals to long-term customers.Its innovations tend to focus on reducing manufacturingcosts.

3. A network services company. This type of firm usestechnology to create a network over which customerscommunicate with one another (i.e., telecommunications/wireless services company). The network becomes thedistribution channel through which the firm markets itsproducts and services. Profits are derived from customer"network time or use." The business is driven by marketshare, which itself is strongly affected by the "quality" ofthe network and the attractiveness of products and servicesoffered. Innovation focuses on creating, improving,and maintaining network quality and on creating and improvingproducts and services. Telephone and utilitiescompanies are good examples of this kind of company.

4. A direct services company. This kind of service companycharges an hourly fee for providing its services. Lawfirms, consulting firms, and accounting firms are examplesof direct services companies.

Exhibit 1.3 shows what kinds of value each kind of companywould be likely to seek from its intellectual capital. Theproduct firms seek value through product income across thespectrum of income-producing mechanisms. Services firmsseek income predominantly through a narrow spectrum ofmechanisms.

While all firms seek strategic positioning value, there is significantvariability in the amount and kind of strategic positioningvalue desired. Differences in company type and/orstrategy may lead to significant differences in the kind of valuea firm expects to realize through its IC. Some kinds of firms (atelecommunications firm, for example) seek a significant portionof the value from their IC in the form of strategic position,image, reputation, market share, etc. Other firms seek to realizevalue in the form of income or revenue. Still others seek ICvalue in the form of strategic position or a mixture of incomeand strategic position. Each firm must develop an appropriatestrategy for realizing the value(s) it seeks from its IC. Howshould it define and measure these values? What activities doesit need to undertake to produce these values? How does a firmensure that the value it wishes to extract from IC is appropriatefor its business strategy?

How can a company manage the extraction of value fromboth intellectual property and intellectual assets? How doesanyone value firms, such as these where a significant portion ofthe firm's value is associated with its intangible intellectualcapital?

This book attempts to answer these questions and others thatfollow from them.

A BRIEF HISTORY

As mentioned earlier, the subject of intellectual capital appearedon the business scene in the 1990s, as if shot from a cannon. Bythe end of the decade, the term intellectual capital had beentransformed from an interesting new idea to a frequently usedand well-understood phrase in the business lexicon.

However, this history actually began in the early 1980s, asmanagers, academics, and consultants around the world beganto notice that a firm's intangible assets, its intellectual capital,were often a major determinant of the corporation's profits. Forexample, in Japan, circa 1980, Hiroyuki Itami noticed the differencein performance among Japanese companies, and aftersome study attributed it to differences in the firms' intangibleassets. His published analysis concluded that intangible assetsare "unattainable with money alone, are capable of multiple,simultaneous use, and yield multiple, simultaneous benefits."In 1986, Karl-Erik Sveiby, the manager and owner of aSweden-based publishing company, published The KnowledgeCompany—a book, written in Swedish, that explained how tomanage these intangible assets. It was the first book in theworld to deal with this subject and inspired the very early"Swedish Movement" in knowledge management and intellectualcapital in both research and practice. Sveiby, today a Professorat Macquarie Graduate School of Management, and aleading thinker in the field, noted that:

Managers in some of the fastest-growing and most profitablebusinesses focus on knowledge, see their businessesfrom a knowledge perspective, and act as if their intangibleassets are real assets. By freeing themselves from themental straitjackets of the industrial age, some of thesepioneer managers have found, seemingly by accidentsometimes, a wellspring of limitless resources arisingfrom the infinite human ability to create knowledge andfrom the convenient fact that, unlike conventional assets,knowledge grows when it is shared.

During the 1980s the prevalent view of business strategy wasbased on the "competitive forces" perspective pioneered byMichael Porter of Harvard University. This approach viewsstrategy formulation as relating to a company and its competitiveenvironment. According to this view, competitive advantagelies with the ability to find "holes" in the market and thento fill those holes with products and services while defendingone's market position against all possible competitors. Duringthe course of the 1980s others were formulating an alternativeview; some American economists developed the view of businessstrategy based on the resources of the firm and the efficiencywith which they are used. This resource-based view ofbusiness strategy postulates that firms can create strategicadvantage over their competitors by developing unique combinationsof tangible and intellectual resources and capabilities.

(Continues...)

Excerpted from Value-Driven Intellectual Capital by Patrick H. Sullivan. Copyright © 2000 John Wiley & Sons, Ltd. Excerpted by permission of John Wiley & Sons.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Edition details

• Publisher: Wiley
• Publication date: 2000
• Language: English
• ISBN 10: 0471351040
• ISBN 13: 9780471351047
• Binding: Hardcover
• Edition number: 1
• Number of pages: 304