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IN the second quarter of fiscal year 2000, Microsoft had a market value of over $600 billion, but the book value of their assets was approximately $45 billion--$22 billion of which were current assets. With less than $2 billion of physical assets, Microsoft is a paragon of the New Economy in which a company's value is found not in earthly measures like revenues, P/E ratios, or market shares but in intellectual capital--organizational culture, customer loyalty, and brand equity. And Microsofts isn't alone: Over the past two decades, the difference between market and book values of U.S. companies hs reached unprecedented levels.
This growing difference arises due to the nature of knowledge-based organizations and their dependence on intellectual capital, which have changed the way we view the value creation process. Traditional financial measures like return on capital and earnings per share-measures that constitute most corporate performance management systems-tell investors and management little about the true performance of the company. Because accounting practices have failed to keep pace with the growing importance of intellectual capital, many of these assets remain out of sight, out of mindoff balance sheets and unmonitored. Without tools to capture and measure intellectual capital, many firms wind up mismanaging their intellectual assets or, worse, destroying knowledge value-simply because managers misunderstand the nature of the company's resources.
Although intellectual assets may not be visible, they can be measured and managed. But if managers want to cultivate intellectual resources, they need to develop performance measures that link internal productivity to market value-added, earthly financials to airy measures of intellectual capital. The firms that develop integrated mechanisms to capture and manage these vital resources will be best prepared to generate sustained returns to shareholders.
DETERMINING THE VALUE OF INTELLECTUAL CAPITAL
Accounting-based performance measurement systems dominate both external market-based evaluation of firms and the internal evaluations of managers and strategic business units. But these accounting tools simply don't capture the value of intellectual capital. Brand equity, research and development, and human capital-among other forms of intellectual capital-don't appear on balance sheets.
To compensate for these accounting shortcomings, a number of consultants and analysts have developed...