This piece is about Intellectual Capital which is the only long term, sustainable market differentiator of a firm.
Lots of friends have requested for a post that enlightens them on an overall primer to upgrade their appreciation of finance. However, being not a finance professional, I would prefer to give it a pass and rather discuss the concept of CAPITAL as understood by Leadership.
For the leadership uninitiated, a firm has 5 types of capitals...
Financial Capital...physical tangible assets that appear on the firm's Balance Sheet and other Financial Statements
Strategic Capital...the firm's knowledge of its markets and the business model it needs to adopt
Intellectual Property....inventions that are legally recognised as uniquely belonging to the firm like copy rights, patents and trade marks.
Spiritual Capital all the unseen positive values practised, belief systems, governance norms etc which provides the moving spirit, morale and character to the firm. AND
Intellectual (intangible) Capital all the knowledge assets belonging to that firm which is built over 3 components...
(a) it's human capital
(b) its customer capital and
(c) its structural capital
Whilst finance is the life providing ether of an enterprise, it is an erroneous belief that the ultimate success of an enterprise is a direct outcome only of the quantum, class and quality of its financial capital. That's like missing the woods for the trees. Recall the lesson we learnt at school...quality of the Lemon fruit is directly an outcome of the overall health of the Lemon tree !!!
Intellectual Capital is the sum total of its Human, Customer and Structural capital required to drive 'core' business of the firm and provide it with its unique brand differentiator. Intellectual capital creates Financial Capital by converting market opportunities into value thru the unique value chain that it powers.
When paradigms shift adversely and as a consequence impacts the performance of that businesses, it can safely be explained as a paralysis of its Intellectual Capital which impairs normal functioning of the body.Through proper care, medication and regular physiotherapy the body's functioning has to be nursed back to perform its normal tasks much as figuratively the firm's Intellectual Capital would require.
Human Capital is the most critical component of the 3 that make up Intellectual Capital. It represents the combined talents and capabilities of its people which being intangible in nature, is hard to measure but is the only long term, sustainable advantage of a firm. It is the only capital with capacity to drive and fuel the other capitals. The only Capital with a head that thinks and a heart that feels. Thus establishing critical need for human capital to be sensitively managed, emotionally engaged and intellectually stimulated.
Customer Capital is represented by the goodwill, loyalty and relations developed between a firm and its clients/customers which drives the ongoing revenues and valuable long-term relationships
Structural Capital the wire mesh build around the business of the firm to support the structure thru its software, databases, net-works, cartels, membership in Economic Unions etc.