Financial Management Analysis of Knowledge Capital through Techno-Economic Empowerment*

By Rao, Shankar K. | Journal of Financial Management & Analysis, January-June 2009 | Go to article overview

Financial Management Analysis of Knowledge Capital through Techno-Economic Empowerment*


Rao, Shankar K., Journal of Financial Management & Analysis


Introduction

There has been lot of research on knowledge creation in organizations, and its benefits for human progress. Now, as economies across the world are reeling under economic recession, it is pertinent to look beyond the traditional types of economic systems. Over the past few decades, there has been a dramatic shift in economic paradigms since the time of the Industrial Revolution, mainly because of the profound impact of technology.

This is a new revolution which can be aptly termed as 'Technology Revolution'. This revolution has made a larger impact on economic structures of nations, bridging the gap between developed and developing countries. The single most dynamic factor responsible for this revolution is 'Knowledge'which has paved the way for innovations through research and development, resulting in increase in competition to acquire larger market share and enhanced value and profitability.

Knowledge and Value-Intellectual Capital

Knowledge is the intangible asset of organizations and should be measured qualitatively. The main utility of application of knowledge is the value it provides to goods and services, which enhances its usage.

Intellectual Capital is the sum of everything everybody in a company knows that gives it a competitive edge... The purpose of measuring value of its intellectual capital is not to report the financial value, but rather to attempt to report the company's success in managing its intellectual capital. Consider the quintessential manufactured product of the late twentieth century: the microchip. The value of all the chips produced today exceeds the value of the steel produced. What makes them valuable? Certainly not their physical component. Chips are made mainly from silicon, that is, from sand, and not much of it. The value is mainly in the design of the chip, and in the design of the complex machines that make it. It is the intellectual content, not the physical, that is the major contributing factor.1

The advent of the age of services in the latter part of twentieth century saw a leap in the importance of content, to rival trade and technology-based logistics in terms of value creation. . . It can be argued that contentin the form of research and deveIopment(R&D), training, and brand building - contributes at least half of all the value in our society.2 A detailed analysis of benefits derived by Polyhydron Private Limited, Belgaum, India through harnessing intellectual capital has been made by Dr. Kumar 1:

Polyhydron Private Limited (PPL) is the flagship company of Polyhydron Group of Companies. It was established in 1982 and manufactures hydraulic radial piston pumps, valves and accessories. Its products are priced unbeatably low and PPL over a period of 1 5 years has changed the price only marginally. It has maintained this strong marketing strategy through careful implementation of Just-In-Time production system, Kanban system ... etc., where waste elimination is the key. Data highlights the company's spending on R&D activities. This kind of culture in the organization has certainly helped the company to improve its operating efficiency, management of innovation capital, process capital and intellectual capital... It is the knowledge of workforce; the training and intuition of engineers; knowhow of workmen and dedication and commitment of the managing director which have not only improved factory efficiency but also discovered new, innovative products worth millions of rupees.

Knowledge and information may be viewed as intellectual capital underlying the new organizational wealth. Let us also note that information is distinct from data and has a much higher value. The process of extracting information from data is often called data mining. The transformation of data into information significantly increases the value of data. Data mining can thus impact some of the basic economic metrics applied to a corporation. One such measure is "Tobin's Q", which is the ratio of the value of an asset to its replacement cost and developed by Nobel Laureate James Tobin. …

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