Centralization Structure of the Model Term Paper

Pages: 42 (11522 words)  ·  Bibliography Sources: ≈ 37  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business - Management

The data will be analyzed in relation to the context of the study framework and will be utilized to formulate a set of conclusions and recommendations.

II. Analysis and Findings

1. The Survey and Data

The onset of the information age has resulted in the necessity for new accounting practices to accommodate the onset of intellectual capital. Since intellectual capital is an intangible product, new methods of valuation must be identified to estimate its worth to an organization's bottom line. Furthermore, assets involving knowledge are inherent and therefore, no real transactions take place that require a financial exchange (Stewart 3). In order to accommodate intellectual capital needs, new methods of managing assets must be established. Finally, knowledge must be managed efficiently in order to maximize its value.

In order to evaluate its value and importance within an organization, the term intellectual capital must be defined and a background of its necessity for growth and improvement must be established. In its simplest sense, intellectual capital can be defined as "Knowledge applied to work to create value" (Edvinsson and Malone 3). However, a variety of definitions exist for the term to include such factors as technology leadership, ongoing employee training, and response time to client service calls (Edvinsson et al. 3). Other criteria required to establish the existence of intellectual capital include the following (Carroll and Tansey 297-298):

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Legal perspective: Intellectual capital is defined in a legal sense as intellectual property rights for such items as patents, trademarks, and copyrights, also called intangible assets. In relation to the balance sheet, the only item recorded is the registration cost which may be a fraction of the flows generated from reuse and production.

Term Paper on Centralization Structure of the Model Assignment

Unrecorded tangibles: Intellectual capital is often defined in terms of employee skills, research and development, internally generated goodwill, brands, licensing opportunities, and innovative use of customer databases and relationships along the supply value chain. Furthermore, individual personalities can also be considered intellectual capital, and these elements are rarely recorded on the company balance sheet.

Accounting perspective of knowledge based assets: Accountants often define intellectual capital as the difference between market value and book value. This often limits the firm in terms of its balance sheet. Therefore, it is unfair to evaluate an organization's intellectual capital solely in relation to its balance sheet.

A corporate strategy perspective: Intellectual capital is evaluated in terms of four phases of corporate knowledge, including acquisition, accumulation, transformation, and valuation. Strictly speaking, "Intellectual capital is best conceived as the knowledge and creativity available to a firm to implement a business strategy that maximizes stakeholder value" (Carroll et al. 298).

Intellectual capital is also comprised of a combination of two primary elements (Sullivan 133):

Human capital: A company's individual employees, each with personal skills, knowledge, abilities, and know-how. Each employee possesses implicit knowledge that the business wishes to utilize.

Intellectual assets: If an employee commits knowledge to be defined publicly, it can then be utilized by the firm by any means possible.

Firms can own intellectual assets but not Human capital. Therefore, it is in the best interests of business leaders to extract knowledge from their employees and to sustain their loyalty in order to create opportunities for profitability. The Human Capital Index, described in Figure 4, demonstrates the importance of employee retention and growth. A number of evaluation measures are shown in the index. The first measure, the 360-degree assessment, includes the following (Harding Jessup 8):

Senior managers must become the champions of the organization's knowledge strategy for it to be successful. As such, the senior leaders must share common skill sets to have the capacity to communicate the employee's individual role in achieving the overall strategy."

The second measure of the index, Employee Loyalty, provides insight into the important issues that employees face in today's organizations, including quality of life and retention tactics. "To maintain positive attitudes and employee loyalty, employers must demonstrate that they give back more than weekly monetary compensation" (Harding Jessup 8). The idea is that employees who are content and satisfied with their working conditions will strive for greatness in the workplace and will provide the organization with a wealth of opportunities to develop intellectual capital. The final measure of the index, Years of Experience, discusses the relationship of experience levels to educational achievement. The desired objective is to demonstrate that "employees who earned degrees or other professional recognition as a result of their position stayed with it longer, thereby giving the organization the opportunity to capitalize on the knowledge obtained through the education" (Harding Jessup 9). Employers that offer advanced educational opportunities to employees will have a better chance of retaining those employees and their inherent knowledge that may eventually result in the products of intellectual capital.

With the onset of high technology firms in the late twentieth and twenty-first centuries, it is evident that intellect is replacing traditional manufacturing as the force driving the new economy. According to Carroll and Tansey (298-299),

We have seen a revolution in the worldwide political landscape, the rise of intense international competition, faster product development cycles, and explosive growth in the service sector. Complexity and the pace of change are fueled mostly by knowledge and this has generated strong interest in intellectual capital...the leading global firms are increasingly dependent on the rapid production and distribution of knowledge and the need for single global standards for new technological innovations...a corporation is strategically vulnerable if too few of its employees possess adequate workplace knowledge."

Today's economy views employees as a source of revenue generation as they add value through creativity and alternative uses of knowledge (Carroll et al. 300). Therefore, employees are often considered precious commodities if they possess the appropriate mix of knowledge and skill. In terms of intellectual capital, employees are perhaps more important than the bottom line in terms of the endless value that they can provide to an organization.

Traditional accounting measures are designed to provide investors, stakeholders, and customers with pertinent information regarding financial history and stability. In the wake of the increased significance of intellectual property, accounting practices have been harshly evaluated because they do not recognize intellectual property as a tangible asset. It is very difficult to assess the value of IP in conclusive terms since its benefits may continue for an immeasurable period of time. Organizations that solely rely on precise financial results without evaluating the potential rewards of intellectual capital are underestimating their overall worth in a volatile economy. Therefore, it has been recognized in recent years that the measurement of non-financial performance is a critical tool in estimating a firm's overall valuation. However, this feat cannot be accomplished without extreme effort and a potential overhaul of total business practice as firms are not accustomed to thinking about value in terms of intangibles. A new method of assessment must be established that leverages financial assets against the importance of intellectual capital for an organization. Identifying the value of intellectual capital is the first step to an alteration of business practices as well as in estimating its importance to future cash flows.

All organizations possess some form of intellectual capital, whether it is in the form of human capital or intellectual assets. It requires a strong vision and management structure to evaluate and maximize a firm's potential in regards to intellectual capital. All firms possess a unique set of characteristics that establish their framework and potential for growth. In the case of intellectual capital, once a strong vision and strategy are established, the purpose of IC can be defined. Typical roles that IC can play include an offensive role to generate new revenue streams, strategic roles to develop new alliances with other firms to gain access to new capabilities, and long-term roles to gain leverage in a competitive marketplace (Sullivan 137). In 2001, a survey identified that only 20% of all firms possess some form of communicated knowledge management strategy (Woods 2). In order to recognize the importance of managing knowledge capital, communication must be improved across all business units:

Sharing is essential, but sometimes difficult to implement, especially in Old Economy environments where the culture of hoarding knowledge dominated and often remains a major obstacle. To overcome it, pockets of knowledge now stored in vertical business units need to be opened and their contents disseminated across the entire organization" (Woods 3).

The Internet and other forms of technology that provide a smooth transmission of information are feasible options for firms to capitalize on the process of information sharing.

Defining the roles that intellectual capital fill within an organization lead to various management opportunities for growth and change. In many businesses, intellectual capital fulfills more than one role, including patent development. This concept is complex in nature as the firm must determine which assets are most valuable and deserve recognition as patents. Furthermore, organizations must establish capabilities to develop qualitative and quantitative estimates of the value of their intellectual assets (Sullivan 139). The next… [END OF PREVIEW] . . . READ MORE

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