In 2000, the market-to-book value, or in other words, the ratio of the stock-market value to accounting value of the largest 500 companies in the U.S, increased to 6.3. In simple words this means that for every six dollars of market value, only one dollar appeared on the balance sheet as a physical or financial asset. The cause of this large difference has been attributed to the rise in value of intangible assets. ( Source: Getting a grip on Intangible Assets, Harvard Management Update)
In the past decade, there has been an increasing academic and corporate focus on the subject of intangible assets offering clarity to business leaders on the ways to measure and manage these assets in context of a business’s strategic goals. On regulatory front, European Union is soon to introduce standards for reporting on intangible assets.
Our report aims to analyse one such academic framework, developed by Robert S. Kaplan and David P. Norton, which highlights the importance of strategic readiness of intangible assets. The methodology of this conceptual framework is creation of a Strategy Map on which intangible assets have been mapped and measured.
Three key things that emerge from the analysis of this work named Measuring the Strategic Readiness of Intangible Assets and written for Harvard Business Review in 2004are:
1. Identification of the important intangible assets in a business organization.
2. Mapping these intangible assets to a business’s strategy.
3. Understanding the factors that enable these intangible assets to contribute to the success of the business.
It is increasingly clear from the example at the beginning, that, in 21st century’s knowledge-driven, services-dominated, economy, it is the intangible assets, and not so much the physical and financial assets, which are playing an increasingly important role in shaping a business’s success. At the same time, it is realized by management, that there is a need to objectively evaluate the readiness of these intangible assets in enabling a business to achieve its strategy.
For the benefit of analysis, we start by defining intangible assets as any nonphysical assets that can produce economic benefits. These cover intellectual capital, knowledge assets, human capital and organizational capital as well as more specific attributes like quality of corporate governance and customer loyalty. (Zadrozny, Wlodrek).
So what is required to map and manage these assets for the success of a business’s strategy?
Analysis of Situation
According to Kaplan and Norton, while developing Balanced Scorecard (a concept for measuring a company’s activities in terms of its vision and strategies, and helps to give managers a comprehensive view of the performance of a business), they identified three major categories of intangible assets:
|No.||Intangible Assets||Encompassing Elements|
|1||Human Capital||Skills; Training; Knowledge|
|2||Information Capital||Systems; Databases; Networks|
|3||Organization Capital||Culture; Leadership; Alignment; Teamwork|
Further, while understanding the critical success factors that transform a business organization into a performing and strategy focussed entity, the article discusses how these assets need to be mapped to the organization’s strategy on a framework called strategy map. Finally it explains the route by way of which, quantitative values can be assigned which clearly help an organization to understand the readiness of these assets in enabling an organization achieve its strategy.