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]

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

Intellectual capital is the intangible value of a business, covering 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.
A second meaning that is used in academia and was adopted in large corporations is focused on the recycling of knowledge via knowledge management and intellectual capital management (ICM). Creating, shaping and updating the stock of intellectual capital requires the formulation of a strategic vision, which blends together all three dimensions of intellectual capital within the organisational context through exploration, exploitation, measurement, and disclosure. Intellectual capital is used in the context of assessing the wealth of organizations. A metric for the value of intellectual capital is the amount by which the enterprise value of a firm exceeds the value of its tangible assets. Directly visible on corporate books is capital embodied in its physical assets and financial capital; however all three make up the value of an enterprise. Measuring the real value and the total performance of intellectual capital's components is a critical part of running a company in the knowledge economy and Information Age. Understanding the intellectual capital in an enterprise allows leveraging of its intellectual assets. For a corporation, the result will optimize its stock price.

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]

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. [5] 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. [6]

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.

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. [7] 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.) [8] 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 [9] (ii)Process capital which include production decisions on quality management,employee programs, efficiency in operations and organizational flexibility [10] (iii) Innovation capital that measures the ability of a firm in creating and nurturing new products and services for competitive advantage [11]

Mergers and acquisitions transactions in which the ownership of companies, other business organizations or their operating units are transferred or combined

Mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

Related Research Articles

A license or licence is an official permission or permit to do, use, or own something.

Human capital is the stock of knowledge, habits, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value. Human capital theory is closely associated with the study of human resources management as found in the practice of business administration and macroeconomics. The original idea of human capital can be traced back at least to Adam Smith in the 18th century. The modern theory was popularized by Gary Becker, an economist and Nobel Laureate from the University of Chicago, Jacob Mincer, and Theodore Schultz. As a result of his conceptualization and modeling work using Human Capital as a key factor, the Nobel Prize for Economics, 2018, was awarded (jointly) to Paul Romer who founded the modern innovation-driven approach to understanding economic growth.

In economics, capital consists of an asset that can enhance one's power to perform economically useful work. For example, in a fundamental sense a stone or an arrow is capital for a caveman who can use it as a hunting instrument, while roads are capital for inhabitants of a city.

An intangible asset is an asset that lacks physical substance. It is defined in opposition to physical assets such as machinery and buildings. An intangible asset is usually very hard to evaluate. Patents, copyrights, franchises, goodwill, trademarks, and trade names. The general interpretation also includes software and other intangible computer based assets are all examples of intangible assets. Intangible assets generally—though not necessarily—suffer from typical market failures of non-rivalry and non-excludability.

Return on capital (ROC), or return on invested capital (ROIC), is a ratio used in finance, valuation and accounting, as a measure of the profitability and value-creating potential of companies after taking into account the amount of initial capital invested. The ratio is calculated by dividing the after-tax operating income (NOPAT) by the book value of both debt and equity capital less cash/equivalents.

A value network is a business analysis perspective that describes social and technical resources within and between businesses. The nodes in a value network represent people. The nodes are connected by interactions that represent tangible and intangible deliverables. These deliverables take the form of knowledge or other intangibles and/or financial value. Value networks exhibit interdependence. They account for the overall worth of products and services. Companies have both internal and external value networks.

The resource-based view (RBV) is a managerial framework used to determine the strategic resources with the potential to deliver competitive advantage to a firm. These resources can be exploited by the firm in order to achieve sustainable competitive advantage.

A knowledge market is a mechanism for distributing knowledge resources. There are two views on knowledge and how knowledge markets can function. One view uses a legal construct of intellectual property to make knowledge a typical scarce resource, so the traditional commodity market mechanism can be applied directly to distribute it. An alternative model is based on treating knowledge as a public good and hence encouraging free sharing of knowledge. This is often referred to as attention economy. Currently there is no consensus among researchers on relative merits of these two approaches.

Michael S. Malone American writer

Michael Shawn Malone is an American author, columnist, editor, investor, businessman, television producer, and has been the host of several shows on PBS. Currently (2009), Malone is a columnist for ABC News, an op-ed contributor for The Wall Street Journal, a contributing editor to Wired, and the editor-in-chief of Edgelings.com, a website focused on business and technology news in Silicon Valley.

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 is the branch of finance that deals with intangible assets such as patents and reputation. Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time.

Asset economic resource, from which future economic benefits are expected

In financial accounting, an asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset. Simply stated, 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.

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.

Johan Roos is a Swedish organizational theorist known for his work on intellectual capital. He currently serves as Chief Strategy Officer at Hult International Business School, previously having served as President of Copenhagen Business School and Dean of the Stockholm School of Economics.

National intangible capital (NIC) performance for 59 countries 2014 as measured by the ELSS (Edvinsson-Lin-Ståhle-Ståhle) methodology for measuring stock of national intangible capital, economic impacts and efficiency of NIC: Research is supported as an initiative by The New Club of Paris.

Network Orchestrator Companies are defined as:

... companies [that] create a network of peers in which the participants interact and share in the value creation. They may sell products or services, build relationships, share advice, give reviews, collaborate, co-create and more. Examples include eBay, Red Hat, Visa, Uber, Tripadvisor, and Alibaba.

References

  1. http://staffweb.hkbu.edu.hk/vwschow/lectures/ism3620/rp01.pdf
  2. 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. Martín-de-Castro, Gregorio, et al. "Organizational capital as competitive advantage of the firm." Journal of Intellectual Capital 7.3 (2006): 324-337.
  6. Edvinsson, Leif. "Developing intellectual capital at Skandia." Long range planning 30.3 (1997): 366-373.
  7. Carlin, Bruce Ian, Bhagwan Chowdhry, and Mark J. Garmaise. "Investment in organization capital." Journal of Financial Intermediation (2011), p15-16
  8. Carlin, Bruce Ian, Bhagwan Chowdhry, and Mark J. Garmaise. "Investment in organization capital." Journal of Financial Intermediation (2011), p16-17
  9. Bruhn, Miriam, D. Karlan & A. Schoar (2010) What capital is missing in developing countries? American Economic Review: Papers and Proceedings 100: 629-633.
  10. Edvinsson L, Malone MS. 1997. Intellectual Capital: Realizing Your Company’s True Value by Finding Its Hidden Roots. HarperBusiness: New York.
  11. Edvinsson L, Malone MS. 1997. Intellectual Capital: Realizing Your Company’s True Value by Finding Its Hidden Roots. HarperBusiness: New York.