Making Profit From Intellectual Capital

Intellectual Capital Conference Jakarta, 8 March 2005

Daniel Andriessen Professor of Intellectual Capital INHOLLAND University of professional education Amsterdam, The Netherlands

Simplified Chinese

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We Live in a Strange Economy

Age 32 native of Michigan PhD at Stanford Larry Page

Age 32 native of Moscow PhD at Stanford Sergey Brin

Worth US$ 11,000,000,000 each

Source: Forbes.com
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Every Company Is Like a Tree

Based on Leif Edvinsson

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That Is Best Viewed Upside Down

Based on Leif Edvinsson

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Intellectual Capital Is the Driver of Value

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural Capital

Relational Capital

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MIT Has Knowledge

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural Capital

Relational Capital

Implicit knowled ge

Explicit knowled ge

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Mckinsey Has Skilled Workers

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural Capital

Relational Capital

Implicit knowled ge

Skills

Attitude

Reputat ion

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Philips Has Intellectual Property

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural Capital

Relational Capital

Implicit knowled ge

Skills

Attitude

Explicit knowled ge

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McDonalds Has Processes

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural capital

Relational capital

Implicit knowled ge

Skills

Attitude

Explicit knowled ge

Process es

Reputat ion

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GE Has Pride and Ambition

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural capital

Relational capital

Implicit knowled ge

Skills

Attitude

Explicit Process knowled es ge

Culture

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Nike Does Not Manufacture Shoes

Companies
Tangible capital Intellectual capital Financial capital

Human Capital

Structural capital

Relational capital

Implicit knowled ge

Skills

Attitude

Explicit Process knowled es ge

Culture

Network Reputat s ion

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Brand of the Year 2005

Source: Brandchannel.com

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Rabobank Has Involved Customers

Companies
Tangible capital Intellectual capital Financial capital

Human Capital
Implicit knowled ge

Structural capital

Relational capital

Skills

Attitude

Explicit knowled ge

Process es

Culture

Network Reputat s ion

Custom er capital

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Four Duties of Management

Manage Manage Intellectual Intellectual Capital Capital

Report Report Intellectua Intellectua llCapital Capital

Intellectual capital

Human Capital

Structural Capital

Relational Capital

Protect Protect Intellect Intellect ual ual Capital Capital

Make Make Money Money from from Intellect Intellect ual ual Capital Capital

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Four Duties of Management

Manage Manage Intellectual Intellectual Capital Capital

Report Report Intellectua Intellectua llCapital Capital

Intellectual capital

Human Capital

Structural Capital

Relational Capital

Protect Protect Intellect Intellect ual ual Capital Capital

Make Make Money Money from from Intellect Intellect ual ual Capital Capital

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Manage Intellectual Capital

Intellectual capital

Human Capital

Structural Capital

Relational Capital

Managing Knowledge Professionals

Knowledge Management Intellectual Property Management

Brand Management Customer Relationship Management

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Four Duties of Management

Manage Manage Intellectual Intellectual Capital Capital

Report Report Intellectua Intellectua llCapital Capital

Intellectual capital

Human Capital

Structural Capital

Relational Capital

Protect Protect Intellect Intellect ual ual Capital Capital

Make Make Money Money from from Intellect Intellect ual ual Capital Capital

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Protect Intellectual Capital

Intellectual capital

Human Capital

Structural Capital

Relational Capital

Confidentiality agreements Employee satisfaction

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Protect Intellectual Capital

Intellectual capital

Human Capital

Structural Capital Patents Registered Designs Plant Varieties Design Rights Copyright

Relational Capital

Gravity powered shoe air conditioner US Patent No.

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Protect Intellectual Capital

Intellectual capital

Human Capital

Structural Capital

Relational Capital

Trade Marks Domain Names

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330 New Patents Filed Each Day

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Companies Failing to Protect IC

Xerox failed to patent and exploit technology invented in its famous Palo Alto Research Centre. Among these inventions are: The Personal Computer that generated billions of dollars for many computer companies like Compaq Ethernet technology made 3Com famous The laser printer has made Hewlett Packard billions of dollars WYSIWIG has made Adobe a household name in type font software The GUI technology became the foundation for Apple computers Macintosh and Microsofts Windows Operating System Kodak lost a billion-dollar patent (instant cameras) infringement case to Polaroid by failure to assess properly the patent landscape before launching a major productdevelopment effort. $925 million in damages to Polaroid $1.5 billion because of shutting down manufacturing plant 700 plant workers to be laid off $500 million to buy back the 16 million instant cameras sold between 1976-1985 $100 million dollar to be paid in legal fees during the 14-year long battle $? To be written off at a total loss of R&D Effort and Investment
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Four Duties of Management

Manage Manage Intellectual Intellectual Capital Capital

Report Report Intellectua Intellectua llCapital Capital

Intellectual capital

Human Capital

Structural Capital

Relational Capital

Protect Protect Intellect Intellect ual ual Capital Capital

Make Make Money Money from from Intellect Intellect ual ual Capital Capital

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Companies That Made Money From IC

At IBM, an IP management effort boosted annual patent licensing royalties from $300 million in 1990 to more than $1 billion today. This was accomplished by aggressively licensing technology and exploiting IP beyond core business operations, as well as licensing potential competitors in the PC hardware, semiconductors storage and software business. Texas Instruments began its patent licensing efforts in the mid-1980s when it faced bankruptcy. Since that time, it has earned $4 billion in patent royalties and its current licensing revenues are estimated to be in the neighbourhood of $800 million a year. Coca-Cola generates approximately $500 million annually from its trademarklicensing program, at a profit margin about 80%. Coke has licensed its trademark for use in clothes and other personal items like playing cards. There are stores that specialize in selling Coke trademarked items.
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Four Duties of Management

Manage Manage Intellectual Intellectual Capital Capital

Report Report Intellectua Intellectua llCapital Capital

Intellectual capital

Human Capital

Structural Capital

Relational Capital

Protect Protect Intellect Intellect ual ual Capital Capital

Make Make Money Money from from Intellect Intellect ual ual Capital Capital

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Should IC be on the Balance sheet?

The system of double-entry bookkeeping is more than 500 years old. It was popularised by the Italian monk Luca Pacioli, and is based on transactions with 3rd parties. A transaction, like the sale of a product, results in changes in the income statement and the balance sheet: sales revenue and cost of goods sold expense will rise, the inventory decreases and cash and owners equity increases. IC only appears on the balance sheet when it is acquired (goodwill)
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Three reasons NOT to put IC on balance sheet:

Not allowed
Only acquired IC can be put on balance sheet

Not possible
Intangible resources are no rival assets The value of intangibles can increase or decrease without any transaction taking place Intangible assets are impossible to count and keep a tally of

No need
Intention of Balance Sheet is NOT to represent the value of the company but to match costs and revenues External stakeholders not only use balance sheet to assess companies Current treatment of investments in IC as expenses leads to distortion in income statement. However, distortion is often small compared with other distortions (e.g. depreciation methods)
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IC Reporting Across The World

SWEDEN

ICELAND

DENMARK

GERMANY

UNITED KINGDOM

AUSTRIA

AUSTRALIA

JAPAN31/40

Intellectual Capital Of Nations

IC Monitor

Our Intellectual Capital Monitor is based on an emerging standard

Human Capital

Structural Capital

Relational Capital

Investments

HCI

SCI

RCI

Assets

HCA

SCA

RCA

Effects

HCE

SCE

RCA

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Human Capital
Public expenditure on education as a percentage of GDP (2001)
DK SE FI BE PT AT FR EURO-15 USA NL IT UK DE ES IE EL LU JP 0 1 2 3 3.91 3.85 3.57 4 5 6 7 8 9 5.09 5.08 4.99 4.98 4.69 4.57 4.41 4.35 6.24 6.12 5.9 5.79 5.73 7.31 8.5

Source: Eurostat Structural Indicators

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Structural Capital
Gross domestic expenditure on R&D as a percentage of GDP (2001)
SE FI JP USA DE DK FR BE EURO-15 AT UK NL LU (2000) IE IT ES PT EL 0 0.5 0.64 1 1.5 2 2.5 3 3.5 4 4.5 35/40 0.85 0.95 1.17 1.11 1.71 1.98 1.9 1.89 1.89 2.17 2.23 2.51 2.4 2.72 3.07 3.41 4.27

Source: Eurostat, Structural indicators

IC Investments
DK SE FI BE DE FR NL AT UK IE PT LU IT ES EL EURO-15 JP USA 0.00 0.10 0.20 0.30 0.40 0.50 HCI SCI 0.60 0.70 0.80 0.90 1.00
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IC Assets
SE DK FI UK IE AT NL BE DE FR LU ES PT EL IT EURO-15 JP USA 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80

HCA

SCA

RCA

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IC Effects
DE LU UK NL DK SE FR IE FI BE AT IT ES EL PT EURO-15 JP USA 0.00 0.10 0.20 0.30 HCE SCE 0.40 RCE 0.50 0.60 0.70
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Conclusions
1. Investments in IC pay off We found a strong correlation between HCI and HCA (0.470) and between SCI and SCA (0.686) 2. HC and SC go together HC and SC are interdependent and mutual enhancing factors 3. High value of IC assets is no guarantee for high productivity Low value of IC assets do seem to be a guarantee for low intellectual productivity 4. Europa, compared to USA and Japan, has a long way to go But is catching up.

What does this indicate for Indonesia?

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Thank You!

Dr. Daniel Andriessen Professor of Intellectual Capital INHOLLAND University of Professional Education Amsterdam/ Diemen The Netherlands Daan.andriessen@inholland.nl www.inholland.nl/intellectualcapital +31-204951719

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