Organizational capital

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Organizational capital is the value to an enterprise which is derived from organization philosophy and systems which leverage the organization's capability in delivering goods or services. [1]

Contents

Overview

Organizational capital is one of the three components of structural capital, itself a component of intellectual capital. [2] But, as with other intangible assets, there is no consensus definition of what this organizational capital is, how to measure it, or how to best quantify its contribution to output (either current or future). [3]

Organizational capital was first defined by Prescott and Visscher (1980) to be the accumulation and use of private information to enhance production efficiency within a firm. This capital can be a significant source of firm value. [4]

Organizational capital can be formally modeled as a cluster of complementary practices and the existence of these complementarities in organizations can be empirically tested. [5] . Brynjolfsson, Lorin Hitt and Shinkyu Yang measured organizational capital in a sample of several hundred large American firms over 11 years and found that it was correlated with information technology (IT) investments and that the combination of IT and organizational capital was disproportionately productive. [6] This suggests a degree of complementary between IT and certain organizational investments such as structural decentralization.

The elements that constitute the organizational capital or capital of the firm, namely its culture, structure, organizational learning, can be a source of competitive advantage. [7] Leif Edvinsson, former head of Intellectual Capital at Skandia, was among the first to recognize that intangible assets, including organizational capital, were not represented in traditional accounting systems. [8]

Research regarding organizational capital suggests that there are implications for mergers and acquisitions. Carlin, et al. conclude that the most efficient mergers are between large firms with substantial organization capital and smaller firms with little organization capital. [9] They conclude that firms with richer "languages" retain more employees and are therefore more likely to promote senior managers from within, exhibit greater variability in the compensation levels of their managers and that compensation rises more quickly over time in firms with richer languages.(For proxies of "language" they used density of social networks and the quality of relationships within those networks.) [10] Organizational capital can be decomposed into three firm specific capitals; (i)Managerial capital which denotes managerial skills that mix all internal capabilities in an intelligible way through absorption and application of new ideas that promote growth and value of the firm [11] (ii)Process capital which include production decisions on quality management, employee programs, efficiency in operations and organizational flexibility [2] (iii) Innovation capital that measures the ability of a firm in creating and nurturing new products and services for competitive advantage [2]

Related Research Articles

Physical capital represents in economics one of the three primary factors of production. Physical capital is the apparatus used to produce a good and services. Physical capital represents the tangible man-made goods that help and support the production. Inventory, cash, equipment or real estate are all examples of physical capital.

Human capital or human assets is a concept used by economists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial impact on individual earnings. Research indicates that human capital investments have high economic returns throughout childhood and young adulthood.

Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people, the value relating to its relationships, and everything that is left when the employees go home, of which intellectual property (IP) is but one component. It is the sum of everything everybody in a company knows that gives it a competitive edge. The term is used in academia in an attempt to account for the value of intangible assets not listed explicitly on a company's balance sheets. On a national level, intellectual capital refers to national intangible capital (NIC).

In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. A typical example is the machinery used in a factory. At the macroeconomic level, "the nation's capital stock includes buildings, equipment, software, and inventories during a given year."

An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, reputation, R&D, know-how, as well as any form of digital asset such as software and data. This is in contrast to physical assets and financial assets.

In finance, valuation is the process of determining the value of a (potential) investment, asset, or security. Generally, there are three approaches taken, namely discounted cashflow valuation, relative valuation, and contingent claim valuation.

The productivity paradox refers to the slowdown in productivity growth in the United States in the 1970s and 1980s despite rapid development in the field of information technology (IT) over the same period. The term was coined by Erik Brynjolfsson in a 1993 paper inspired by a quip by Nobel Laureate Robert Solow "You can see the computer age everywhere but in the productivity statistics." For this reason, it is also sometimes also referred to as the Solow paradox.

<span class="mw-page-title-main">Erik Brynjolfsson</span> American academic

Erik Brynjolfsson is an American academic, author and inventor. He is the Jerry Yang and Akiko Yamazaki Professor and a Senior Fellow at Stanford University where he directs the Digital Economy Lab at the Stanford Institute for Human-Centered AI, with appointments at SIEPR, the Stanford Department of Economics and the Stanford Graduate School of Business. He is also a research associate at the National Bureau of Economic Research and a best-selling author of several books. From 1990 to 2020, he was a professor at MIT.

The resource-based view (RBV), often referred to as the "resource-based view of the firm", is a managerial framework used to determine the strategic resources a firm can exploit to achieve sustainable competitive advantage.

Intellectual property assets such as patents are the core of many organizations and transactions related to technology. Licenses and assignments of intellectual property rights are common operations in the technology markets, as well as the use of these types of assets as loan security. These uses give rise to the growing importance of financial valuation of intellectual property, since knowing the economic value of patents is a critical factor in order to define their trading conditions.

AlphaIC is a method for assessing the value of information technology (IT) investments that surpasses banal ROI analyses and looks at how IT affects an organization's intellectual capital.

Intangible asset finance, also known as IP finance, is the branch of finance that uses intangible assets such as intellectual property and reputation to gain access to credit. Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time.

In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything that can be used to produce positive economic value. Assets represent value of ownership that can be converted into cash . The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business. Total assets can also be called the balance sheet total.

In international trade, foreign market entry modes are the ways in which a company can expand its services into a non-domestic market.

Structural capital is one of the three primary components of intellectual capital, and consists of the supportive infrastructure, processes, and databases of the organisation that enable human capital to function. Structural capital is owned by an organization and remains with an organization even when people leave. It includes: capabilities, routines, methods, procedures and methodologies embedded in organisation.

Relational capital is one of the three primary components of intellectual capital, and is the value inherent in a company's relationships with its customers, vendors, and other important constituencies. It also includes knowledge, capabilities, procedures and systems which are developed from relationships with external agents.

Process capital is the value to an enterprise which is derived from the techniques, procedures, and programs that implement and enhance the delivery of goods and services. Process capital is one of the three components of structural capital, itself a component of intellectual capital. Process capital can be seen as the value of processes to any entity, whether for profit or not-for profit, but is most commonly used in reference to for-profit entities.

<span class="mw-page-title-main">Economics of digitization</span>

The economics of digitization is the field of economics that studies how digitization, digitalisation and digital transformation affects markets and how digital data can be used to study economics. Digitization is the process by which technology lowers the costs of storing, sharing, and analyzing data. This has changed how consumers behave, how industrial activity is organized, and how governments operate. The economics of digitization exists as a distinct field of economics for three reasons: it studies a world that is digital, exponential and combinatorial. First, new economic models are needed because digital goods have very low or even zero marginal costs unlike most traditional goods, thus many traditional assumptions no longer hold in a digitized world. Second, the rate of improvement of computers, networks and other engines of digitization, is exponential, as reflected by Moore's Law. Third, digital goods can easily be combined and recombined, increasing their value not only via networks and platforms, but also novel combinations. Each of these effects is important individually, but together they have synergies and constitute a distinct economic landscape.

Leif Edvinsson is a Swedish organizational theorist, Professor at the University of Lund in Sweden and consultant, known for his work on intellectual capital. and knowledge management.

ISO 56000 is a family of standards designed to provide a framework for organizations to implement, maintain and improve innovation management systems.

References

  1. ↑ "Archived copy" (PDF). Archived from the original (PDF) on 2013-01-23. Retrieved 2013-01-30.{{cite web}}: CS1 maint: archived copy as title (link)
  2. 1 2 3 Edvinsson L, Malone MS (1997) Intellectual capital: realizing your company’s true value by finding its hidden roots. HarperBusiness, New York
  3. ↑ Black, Sandra E., and Lisa M. Lynch. "Measuring organizational capital in the new economy." Measuring capital in the new economy. University of Chicago Press, 2005. 205-236.
  4. ↑ Carlin, Bruce Ian, Bhagwan Chowdhry, and Mark J. Garmaise. "Investment in organization capital." Journal of Financial Intermediation (2011)
  5. ↑ Brynjolfsson, Erik; Milgrom, Paul (2012). "Complementarity in Organizations[The Handbook of Organizational Economics]". Introductory Chapters.
  6. ↑ Brynjolfsson, Erik; Hitt, Lorin M.; Yang, Shinkyu (2002). "Intangible Assets: Computers and Organizational Capital". Brookings Papers on Economic Activity. 2002 (1): 137–181. ISSN   0007-2303.
  7. ↑ Martín-de-Castro, Gregorio, et al. "Organizational capital as competitive advantage of the firm." Journal of Intellectual Capital 7.3 (2006): 324-337.
  8. ↑ Edvinsson, Leif. "Developing intellectual capital at Skandia." Long range planning 30.3 (1997): 366-373.
  9. ↑ Carlin, Bruce Ian, Bhagwan Chowdhry, and Mark J. Garmaise. "Investment in organization capital." Journal of Financial Intermediation (2011), p15-16
  10. ↑ Carlin, Bruce Ian, Bhagwan Chowdhry, and Mark J. Garmaise. "Investment in organization capital." Journal of Financial Intermediation (2011), p16-17
  11. ↑ Bruhn, Miriam, D. Karlan & A. Schoar (2010) What capital is missing in developing countries? American Economic Review: Papers and Proceedings 100: 629-633.
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