CHAPTER 2: THE CONCEPTS AND INTELLECTUAL CAPITAL
2.5. Intellectual capital measurement models
One of the topics in the discussion about intellectual capital is that it is immeasurable (Wall, Kirk, & Martin, 2003). The real problem, however, is not that there is no way to measure intellectual capital. There are too many different ways to measure
intellectual capital; however, the results of the measurement are often diverse and contradictable (Fritzsche, 2012). According to Sveiby (2005), “the first question for any one embarking on a measurement initiative must be: what is the purpose of our measuring initiative?”. Luthy (1998) and Mitchell Williams (2001) categorize IC measurement into at least three categories of measurement models as illustrated in Table 2.3. The quantitative approach is designed to assign a numerical value to intellectual capital. Another measurement is the qualitative approach reported in scorecards with the aim of identifying what is important to the organization in progress of objective achievement.
Table 2.3. Summary of measurement approaches that are mainly used in intellectual capital research
Quantitative approaches Qualitative approaches Market
capitalization model
- Tobin q
- Market-to-book value
- Investor-assigned market value (IAMVTM)
- Intangible Assets monitorTM
- Skandia NavigatorTM - Balanced ScorecardTM - IC indexTM
- Value Chain
Scoreboard Return on
Assets model
- Value added intellectual capital coefficient (VAICTM)
- Calculated intangible value - Economic value added (EVATM) Direct
intellectual capital model
- Intellectual asset valuation - Total value creation (TVCTM)
- Inclusive valuation methodology (IMVTM)
Source: Levy (2009)
Quantitative approach – Market capitalization model
According to Sveiby (2005), the methods under the market capitalization model offer some ways to calculate the value of intellectual capital through the difference between the company’s market capitalization and its shareholders’ equity in book value. The characteristic of the market capitalization model is that they all use capital market values to estimate the value of intellectual capital. Prominent methods under this model such as Tobin q, Market-to-book value and Investor-assigned market value (IAMVTM) are
discussed shortly in Appendix 8, beyond the scope of this study. The market capitalization model copes with the challenge that it totally relies on the market as a mechanism for assessing the excess value of a firm over its replacement cost adjusted balance sheet.
Quantitative approach – Return on assets model
In most of the ROA methods, the authors attempt to develop an indicator in order to determine the efficiency or potential value of IC. This method is calculated as follows:
“Average pre-tax earnings of a company for a period of time are divided by the average tangible assets of the company. The result is a company ROA that is then compared with its industry average. The difference is multiplied by the company's average tangible assets to calculate average annual earnings from the intangibles. By dividing the average earnings by the company's average cost of capital or interest rate, an estimate of the value of its intangible assets or intellectual capital can be found.” (Sveiby, 2005, p. 126)
Some of the more applied methods under this category including Value Added Intellectual Capital Coefficient, Calculated Intangible Value and Economic Value Added, are discussed below in Appendix 9. Most of the methods discussed under this category use some indicators that are derived from historical financial reports as proxies for the value of intellectual capital. The limitation of this model is that it is not provide any measure if IC required to start a company because it provides a measure of IC while operating.
Quantitative approach – Direct intellectual capital model
The model that directly evaluate the values of IC components are also varied due to the way that these methods opt numerous variables in the direct intellectual capital consideration. Generally, these variables are firstly included in some categories. Each category has a number of IC components or variables. These components are identified and measured separately within each category and then are combined to form an aggregate measure of intellectual capital. The qualification of the IC components requires various scales such as number counts, dollar values and ratios. Some of the more popular methods under this category including Intellectual asset valuation, Total value creation (TVCTM), Inclusive valuation methodology (IMVTM), are discussed below in Appendix 10.
Qualitative approach – Scorecard model
In this model, the various components of intangible assets or intellectual capital are identified, and indicators/ indices are generated and reported in scorecards. The scorecard model is similar to direct IC model, except that no estimate is made of the dollar value of
the intellectual capital. The purpose of qualitative models is to identify what is important to the organization and assist the organization in monitoring its progress with regard to those stated objectives. Some of the more popular methods under this category including Intangible Assets monitorTM, Skandia NavigatorTM, IC indexTM, Balanced ScorecardTM, Value chain Scoreboard. The detailed discussion of these methods summarized in short in Appendix 11, but is beyond the scope of this research.
SUMMARY OF CHAPTER 2
Chapter 2 presents the concepts of intellectual capital, strategic management accounting practices, corporate performance, and reviews some of IC measurement models before developing this study’s research models.
Although it is not unanimous about the definition of IC, this study agrees with the common aspect in the definition of IC is related to the fact that strategic intangible resources including information and knowledge are identified and managed to acquire competitive advantages. As for the components of the IC, following a broad consensus in a body of literature, this research also agrees with the existence of three primary interrelated components including human capital, structural (internal) capital and relational (external) capital. Luthy (1998) and Mitchell Williams (2001) categorize IC measurement into at least three categories of measurement models, including quantitative approach with direct IC model, ROA model and market capitalization model, qualitative approach with scorecard model. In terms of SMA practices, following the first original work by Guilding et al.
(2000) and the supplementary studies, this study categorizes 18 SMA techniques into 4 groups related to strategic cost management, competitor accounting, strategic accounting and customer accounting.
The four-stage stock market valuation model by Dorestani (2009) is used to report corporate performance, which is evaluated on four dimension including productivity, profitability, non-financial indicators and marketable value. However, this study is limited financial dimensions focus.
The following chapter focuses on underlying conceptual frameworks to develop testable hypotheses which answer research questions to bridge research gaps.