Originally published July 9, 2019

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This is the 46th article in the Profiles in Knowledge series featuring thought leaders in knowledge management. Leif Edvinsson is Professor Emeritus at Lund University in Sweden. He specializes in Intellectual Capital Management of Enterprises, Cities, and Nations; Innovations; and Future Centers.

Leif was the world’s first director of Intellectual Capital, at Skandia in the 1990s, and the world’s first professor of Intellectual Capital, at Lund University in the 2000s. His honors include Brain of the Year from Brain Trust (UK) in 1998 and KEN Practitioner of the Year from Entovation in 2004.

Background

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  • The Hong Kong Polytechnic University KM Research — Professor of Intellectual Capital, 2000 — Present
  • Henley Management College — Professor, Honorary Chairman KM forum, 2000 — Present
  • Lund University / Öresund University — Adj Professor, 2001–2009
  • Skandia — Vice President, 1991–1999
  • SEB — Executive Vice President, 1990–1991
  • University of California, Berkeley — Master of Business Administration, 1974
  • Lund University, School of Economics and Management, Sweden — Civilekonom, 1970
  1. LinkedIn
  2. Facebook
  3. World Capital Institute
  4. Corporate Longitude
  5. Value Based Management
  6. CV
  7. Wikipedia
  8. Gurteen
  9. Entovation
  10. Celebrity Speakers
  11. Global Speakers Bureau
  12. Future Center Alliance
  13. Pearson Education
  14. ICAA — Intellectual Capital Association
  15. Medium

Content

  1. LinkedIn Posts
  2. Emerald Insight
  3. Semantic Scholar
  4. ResearchGate
  5. Mendeley
  6. Google Scholar
  7. Knowledge Navigation and the Cultivating Ecosystem for Intellectual Capital
  8. Developing Intellectual Capital at Skandia
  9. Aspects on the city as a knowledge tool
  10. What National Intellectual Capital Tells Us with Carol Yeh-Yun Lin and Pirjo Ståhle
  11. What National Intellectual Capital Indices Can Tell About the Global Economic Crisis of 2007–2009 with Carol Yeh-Yun Lin
  12. Developing a model for managing intellectual capital with Patrick Sullivan
  • Intellectual Capital — The term ‘intellectual capital’ was first published by John Kenneth Galbraith. His concept of the term incorporated a degree of ‘intellectual action’ rather than ‘intellect as pure intellect’. The implication of this view is that intellectual capital is likely to be a dynamic rather than a static form of capital. We prefer to define intellectual capital as knowledge that can be converted into value. This definition is very broad, encompassing inventions, ideas, general knowledge, designs, computer programs, data processes, and publications. It is not limited to technological innovations, or to just those forms of intellectual property identified by the law (e.g., patents, trademarks, trade secrets). For the manager, intellectual capital (IC) has two major components: human resources and structural capital (including intellectual assets). The distinction between these two kinds of IC is of particular importance to owners of knowledge companies. Unlike human resources, which are not interchangeable and cannot be owned by shareholders, intellectual assets are and can be. For this reason, 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 assets into intellectual assets. To facilitate this transformation, it is important to understand the differences between human and intellectual assets. Parts of a firm’s IC are made up of know-how (tacit knowledge) and intellectual assets (codified knowledge).
  • Value Creation — Knowledge companies have been defined earlier to be those using their knowledge as a source of competitive advantage; and intellectual capital for those firms is ‘knowledge that can be converted into value’. How do knowledge firms create value from their intellectual capital? There are two fundamental sources of value inherent in the knowledge firm model. The first is the innovations themselves. Commercializable innovations are generated by the firm’s human resource, converted into intellectual assets, and legally protected. These innovations become the fuel that drives the firm’s business engine. Firms can have too many innovations just as they can have too few. For firms having too many innovations, their management must develop methods for screening out the less desirable innovations and identifying those that will generate the most value for the firm. Conversely, firms with too few innovations must develop processes that will stimulate innovation (particularly in certain technologies or innovation areas of importance to the firm). The second source of value for knowledge companies resides in the conversion by the firm’s structural business assets. These assets (e.g,, processing, distribution, sales) add value to the innovation as it is converted from an intangible into a product or service for which customers will pay. In terms of extracting value from business assets, knowledge firms are no different than others; they are able to achieve revenue from the value added by each structural business asset during the process of converting an innovation from an intangible into a salable item.

Some perspectives on intangibles and intellectual capital 2000

After posing some questions regarding the nature of intellectual capital, the following explores IC through observing the changes in market dynamics and organizational structure. An IC growth model is discussed which involves IC, human capital injection human capital transformation into structural capital, and structural capital injection.

Emerging questions — a kind of IC quest

When thinking about intellectual capital, the following questions come to mind:

  • What are the hidden value drivers of nations or regions? Does the old economics help to explain this?
  • Do we really see or have a taxonomy to describe the value drivers of companies on the stock exchange?
  • How do we explain the growing gap between market capitalization value and book value?
  • Is there another pattern of value creation and new business logic emerging, other than the often-quoted value chain logic?
  • Is IC about value creation versus cost savings? Is it about outside the firm versus inside the firm? Is it about communities or corporations?
  • Is IC only about knowledge and competence management? Or is it about future earnings capabilities and potentials?

Some marker observations

It might look as if there is a new economy. But could it just be a new sphere for value creation? The so-called intangible sphere or intellectual capital sphere.

Looking at some of the investment patterns in the USA, based on research from Professor Baruch Lev (The old rules no longer apply, Forbes, 7 April 1997) at Stern University, New York, shows a very different investment perspective since 1929. Then approximately 70 per cent of the USA investments went into tangible goods and some 30 per cent into intangibles. However, by 1990 this pattern was inverted, and today the dominant investments, both in the USA and Sweden, go into intangibles, such as R&D, education and competencies, IT software and the Internet. On average, more than 10 per cent of GDP in OECD countries is estimated to go into intangibles or IC. For countries like Sweden this input is estimated to be more than 20 per cent of GDP. It is becoming more and more essential to visualize the IC of nations.

This is also reflected in stock prices. According to Professor Baruch Lev, the average relationship between market value and book value in the late 1970s was one time, in the mid-1990s it had increased to an average of three times, and now it is more than six times the book value. For some companies, like America Online (AOL) and Microsoft, around 90 per cent of their market capitalization value is in intangibles. Such intangibles or IC might be visualized systematically as has been done by Skandia, as well as Turn IT, a stock market listed company in Stockholm.

Furthermore, a big proportion of the global stock market value is in PC companies, estimated to have a joint market capitalization of some US $6,000 billion. This value might then be contrasted by the global market capitalization of Internet companies, estimated to be only US $1,000 billion, i.e., around 15 per cent of that for PC companies. What will the future earnings potential of those companies be versus PC companies?

These aspects are leading, among other things, to the fact that a growing proportion of policy and political initiatives, both at the company and society level, often are distorted due to lack of a relevant map of statistics, accounting figures related to intangibles, value impact and effectiveness. Therefore, several global initiatives, such as that of the Brookings Institute in Washington, are addressing these issues.

Some organizational observations

Industrial value chain processes no longer dominate value creation. Value creation is in the shaping of information, knowledge and innovations — sometimes grouped under the label of intellectual properties (IP). Value creation or value extraction of such intangibles is also often done through another business logic in the shape of value constellations with temporary role participants, leading experts or unique artists. The flow is increasingly going digital in the form of c-commerce. This new type of value transaction has been projected to grow some 15 times over the next three years. The metaphor for this transition is sometimes described as a shift from bricks and mortars to clicks and portals.

In this emerging business world, small business operations interacting in knowledge clusters and global networks employ and engage people, while large corporations deploy them, The average proportion of self-employed people, often referred to as knowledge nomads, in the Group of Seven countries is estimated to be 11 per cent by Hamish Mcrae, London. In the UK this figure is already 15 per cent. Just imagine the potential trend in Asia for free, self-organizing knowledge nomads. Furthermore, Asia is expected to have about 100 per cent more Internet users than the USA within five years. The new economical sphere will be shaped by the soon-to-be 700 million new users in myriads of organizational combinations solving old problems, shaping new opportunities.

This trend will change the way value-creating interactions are done. New organizational rules will emerge, such as much looser organizational structures based on the Internet. The Internet is described by Eric S. Raymond less as a global cathedral and more as a self-organizing bazaar. Sometimes described as chaordic ones by Dee W. Hock (Birth of the Chaordic Age), they are characterized by a combination of order and chaos. It is also a tremendous power shift, challenging traditional management of both corporations and societies to a transformation policy — to see the options to reshape the existing to something new and better. Old intangibles and intellectual properties such as brands might get new values through mergers with new companies with global soft technology assets. One illustration of this is the merger between Time Warner and AOL.

The value creation is going to be in shaping new ideas, exchanging information globally, and interacting through networks with high organizational speed in order to take action. Therefore, it might be more relevant to visualize the new economical sphere from a biological perspective, as a nervous system with energy flows and cells being split, mutated and evolving. It describes life,renewal and movements. Consequently, it will highlight the institutional failures versus the emerging global networks. According to the report by Stall from the corporate executive board in Washington, 45 per cent of failure is related to strategic neglect, 38 per cent is related to organizational ineffectiveness and only 17 per cent is related to exogenous factors. In other words, a lack of organizational renewal or bad organizational float.

Owing to demographical development there is also an emerging talent war. One of the leadership consequences is the need to focus competence and talent inflow by development of organizational or societal attractiveness, instead of competitiveness as a key driver for value constellations and value networks. This will result in more and more management attention on culture, values, ethos and story telling around intangibles (versus traditional historical cost accounting). Sometimes this is also described as an emerging Dream Society, according to Professor Rolf Jensen in The Dream Society: How the Coming Shift from Information to Imagination Will Transform Your Business.

Global growth curve of IC

The following pattern of market capitalization growth and IC global growth phases might be discernible. They are based on the above global context evolution and the personal experiences of being the world’s first director of intellectual capital, starting in 1991 at Skandia AFS. There the IC value has grown from a very minimal value in the early 1990s into some US $15 billion at the beginning of the year 2000.

This might be a guiding vision based on the IC logic of sustainable earnings, to be seen as a tree with roots to be cultivated for the future financial fruits, and as the IC value scheme with its various IC components, as well as the extended organizational capital development prototyped in the Skandia Future Center (see Figure 1).

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Figure 1. Market capitalization value over time

Each phase often results in a stock market appreciation shift, based on increased transparency, as well as new expectations from the future value creation of the intangibles investment.

Phase one is very much about the visualization of intangibles from a reporting perspective. This is supplementary accounting, now being called for by some organizations, such as the Securities and Exchange Commission (SEC) in the USA. A special methodology for this has been developed as an IC rating by Intellectual Capital Sweden AB.

Phase two is very much focused on human capital injection, often labelled competence adding or knowledge management. It is both the search for talents to be added, e.g., by mergers between companies, and the effectiveness from knowledge sharing and installation of IT based knowledge systems, or emerging knowledge exchanges such as Knexa.

The third phase is the systematic transformation of human capital into structural capital as a multiplier, with much more sustainable earnings potential for the organization. It is a refined approach based on the second phase, but very much focused on the packaging of knowledge into recipes to be shared globally and rapidly. It is a shift of leadership focus from human capital on to structural capital as a multiplier for the human talents. The IC multiplier is to offer organizational springboards to human talents. This is very much the case of Skandia AFS, also described in their 1998 IC report, called Human Capital in Transformation.

The fourth phase is structural capital injection externally. It is a turbo effect on the IC multiplier by combining different types of structural capital constellations for co-creation of new opportunities. It is expanding the space of co-creation as the unique space of imagination, and organizational stretch where human capital and structural capital meet. As discussed by Kevin Kelly in his book New Rules for the New Economy: 10 Radical Strategies for a Connected World, here the marginal cost is zero while the upside is on the revenue potentials. One illustration of this is the recent merger between AOL and Time Warner, combining different organizational capital components with complementary customer capital potentials. Another illustration might be the proposed Deutsche Bank and Mannesman alliance for new mobile and Internet banking. It is a shift of perspective from a local and physical focus to a global and intangible focus that will shape innovative prime movers. There also is the new, more intangible intellectual entrepreneurship, such as in the TINIE (telecom, informatics, media and entertainment) sector.

These discernible phases of global IC growth are gradually increasing the value creation potential of organizations.

The intangible or hidden values of the organizational competencies will be developed around fast learning, organizational networking and relationship building, as well as ethos and aesthetics for the brain, leading to more of a symbolic management and meaning of leadership.

The challenge for the IC leadership, both on a corporate level and society level, is therefore both to shape the context for these growth phases, each of them being a huge challenge, and also to communicate these intangible value phases to the stakeholders in a repetitive, auditable and trustworthy way. Just as the old accounting system might be viewed as the first generation of knowledge management tools, now it is time for another generation focused on intellectual capital.

It has been 10 years since I was appointed the world’s first director of Intellectual Capital at Skandia. I am trying to summarize my 10 years with the IC movement and wave. Here are a few reflections:

  • IC is about future earnings potential, i.e., a 180 degree shift of perspective.
  • IC reporting is about (building) trust on future prospects.
  • IC accounting is about the future put into numbers and narratives, i.e., future accounting instead of historical cost accounting.
  • Accounting is the knowledge nerve system of an enterprise, and therefore the world’s first CKO might (actually) have been an accountant in the 1490s in Italy.
  • A lot of learning has emerged. But what is more interesting is that the movement is on its way, with hundreds of companies in Europe following the Danish government, putting together guidelines and recommendations; the SEC is doing the same; the European Commission is funding an EU project called Meritum on the subject, etc. So tentatively in some years down the road we will have supplementary reports on IC and intangibles that today stand for most of the investments in modern economies.
  1. Introduction of Leif Edvinsson
  2. Outcomes of the Skandia KM Initiative
  3. How Can We Capture What We Know but Cannot Tell?
  4. Storytelling Useful for Communicating Knowledge Assets
  5. Catapulting Thoughts on IC for the Next 10 Years
  6. Greater Intangible Asset and IC Appreciation in the Future
  7. Skandia Future Center Sets a New Standard
  8. IC About Future Earnings from Human Perspective
  9. Innovation Involves Rule Breaking
  10. Knowledge Ergonomics for New Organizational Formats
  11. Is There a Definable Line between Software and Wetware Solutions?
  12. Transferring Insights and Experience Known As Backbone Knowledge
  13. Skandia Chatboard: The Perfect Boss
  14. Roles of Tools and Processes
  15. Three Dimensions to IT Usage
  16. Use Knowledge for Innovation, Not Reinvention
  17. Wrap Up — A 10 Year Journey for Skandia and the World
  18. Thank You for the Wisdom of an IC “Grandfather”
  1. Evolution Profile by Greg McIvor
  2. A Brainovation® talk about Knowledge Economics by Anders Hemre
  3. Intellectual Capital of the Nations by The Global Journal
  4. Knowledge Management 2 by BPIR — What do business leaders say about knowledge management? “Of central importance is the changing nature of competitive advantage — not based on market position, size and power as in times past, but on the incorporation of knowledge into all of an organization’s activities.” — Leif Edvinsson, Swedish organisational theorist, known for his work on intellectual capital, in Corporate Longitude (2002)
  5. How to make friends and influence organizations to adopt KM by Richard Cross — Over 10 years ago at one of the first KM conferences, Leif Edvinsson asked an audience that was ready to understand and espouse KM to list the questions they had about KM. Once he had heard the questions, Leif suggested to a shocked audience that implementing KM successfully was about asking the right questions. He was right. Remember, in selling there are no prizes for finishing second. Do your homework. Prepare your questions.
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Knowledge Management Author and Speaker, Founder of SIKM Leaders Community, Community Evangelist, Knowledge Manager https://sites.google.com/site/stangarfield/

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