Intellectual assets are playing a key role in company performance. Two major forces have led them to that position over the past few decades: globalization and advanced information technology. In a highly competitive global market, intangible assets are the key success factor because knowledge assets provide a competitive advantage. Understanding the valuation of intangible assets is the basis of decision-making processes and a key resource for business management.
In order to remain unique and different on the global market, companies pay more attention to intellectual capital such as skills of employees, know-how, software, patents, brands, databases, customer databases and so on. Effective and efficient management of these intellectual resources leads to the production of new values and benefits. Reporting and measuring the whole process has crucial consequences not only for all the members of the company, but also for the general public and investors. Companies cannot rely completely on traditional financial reporting tools, mainly because they are not reliable enough for top management decision processes. The process of creating values and making decisions is not possible if only traditional financial reporting tools are used. That is why it is highly important for each company today to combine these traditional tools with non-financial performance measurements and this represents the biggest potential challenge that the accounting framework is facing nowadays.
Company’s value maximization is generally considered to be one the most important objectives of every company. In the knowledge economy or “new economics era”, the financial performance of a company is always under first observation, not only by internal users of financial information, but by external users as well. The company’s financial performance is under direct or indirect influence by invisible assets and resources owned by a particular company. Those invisible assets or resources are called intellectual capital. Various empirical studies proved that intellectual capital itself directly influences financial company performance.
Illustratively, the meaning of intellectual capital can be linked to the existence of one tree. A tree will grow and flourish healthily to produce fruits only if it receives and absorbs enough rainfall from the sky and light from the sun in a natural environment. The tree lives according to all-natural rules, disciplines, conditions and, in that case, produces necessary fruit products. The tree normally consumes all the necessary resources for its purposes to produce maximum outputs every and each time for the benefits of all forms of life. What is visible to the human eye are all fruit products, trees and leaves. However, what is not visible are roots under the ground. The same applies to intellectual capital. Everything visible are new products, new services, new processes, new procedures, new systems, new employees and new structures. Everything not visible are all components and inputs that created previous elements that are visible, and those are: intellectual capital, human capital, organizational capital, relational capital, knowledge, ideas, innovation, information, competencies, skills and capabilities.
It is up to the top managers and decision makers to identify these invisible and intellectual assets and to invest in them, bearing in mind that the effects of those investments do not come immediately and it requires a long-term period in the same way as the trees produce its fruits.
Professor Milos Petkovic is Lecturer in management sciences at Berlin School of Business and Innovation (BSBI)
His field of interest is related to the topic of strategy, and how companies gain a long-term competitive advantage in the current global market. His work in consultancy allows him to teach students better to understand managerial concepts and methods.
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