Personal Website of R.Kannan
Learning Circle - Intellectual Capital &
Knowledge Management

Home Table of Contents Feedback

Continued from Previous Page

Why is "Knowledge" Important?

Look at just about everything that we use or buy, most of what we pay for is knowledge. Every product now contains knowledge. If you look at a nicely designed ready-made garment intended for an youngster, you may realise that it will cost several times more packaged as a 'product' than the cost of the basic raw material used. A garment manufacturer may select fine cotton and get spun into high count yarn and thereafter may process the yarn and weave into quality fabric in a power-loom. He is a specialist in design and fashion technology and makes out the fashion garment costing Rs.2000/- per piece. Here the basic raw material used viz. cotton and dyes may cost Rs.100 or even less.

The formula of

(raw goods + knowledge = revenue)

is very simple but shows the essence of separating the knowledge element from the physical raw product. In other words, buy cotton and other raw-materials for Rs.10,000/-, add knowledge to produce ready-made garments, and you end up with goods which have a retail value of perhaps Rs.2,00,000. If this is a case of an ordinary every-day product of mass consumption, what is the value-addition in several high-tech products?

Everything else, from buying cotton, weaving into yarn, processing thereof and weaving into quality cloth and even stitching the garments as per design provided, can be outsourced to 'industrial age' companies. That means that it is important to separate knowledge from the product it is delivered in. Yet we generally mainly consider assets to be physical, neglecting the most valuable part, the knowledge.

In this example, 'knowledge' includes manufacturing processes, trademarks, distribution etc. it's not important that the Garment Company owns factories to produce goods and vehicles to distribute them. The most important thing is that they have the knowledge to have those goods produced and distributed.

Software companies like Oracle, Netscape and Macromedia are similar examples. They do not own the printing presses that produce manuals or the lorries to deliver products. This work is outsourced. They concentrate on the part, which they do best which is developing and selling knowledge. They own some structural capital including items necessary for their staff to perform their jobs, mainly desks, chairs and computers. No factories, mills or mines.

Book Value and Knowledge Capital

As mentioned earlier in 1997, IBM purchased Lotus for $3.5 billion, a noteworthy exchange of property considering that the book value of Lotus at that time was only half a billion dollars. Today companies are routinely bought and sold for three to four times their book value. In fact, when purchasing a company, we are only interested in that figure above the book value the intangible assets, or the knowledge of the firm, its knowledge capital.

Intangible assets have always been around. But they have suddenly moved from a secondary position to a primary position when one considers the value of the firm. Let's examine a company in terms of tangible and intangible assets.

Tangible and Intangible Assets

An enterprise is made up of tangible assets, intangible assets and financial capital. Tangible assets are required for business operations, and are recorded on the balance sheet. Examples of tangible assets include- manufacturing plants, equipment, buildings and other elements of physical infrastructure, etc. However, it is our intangible assets (our intellectual capital) that will provide competitive advantage in the knowledge era. Examples of intangible assets include: technological know-how, customer loyalty, branding, business processes, etc. Think about your own organization in terms of intangible assets, tangible assets and financial capital.
[ Source: Information on intellectual capital and information age etc. from http://www.intellectualcapital.org/intro.html.]

Business Enterprises are realising how important it is to "know what they know" and be able to make maximum use of the knowledge. This knowledge resides in many different places such as: databases, knowledge bases, filing cabinets and peoples' heads and are distributed right across the enterprise. All too often one part of an enterprise repeats work of another part simply because it is impossible to keep track of, and make use of, knowledge in other parts. Enterprises need to know:

  • what their knowledge assets are;

  • how to manage and make use of these assets to get maximum return.

The process of capturing knowlwedge, effectively storing it and purposefully sharing it to the best advantage are all covered by "knowledge Management", which we will cover in the next part of the chapter.


- -- : ( EoP ) : - - -

Previous               Top               Next

[..Page Updated on 20.09.2004..]<>[chkd-appvd -ef]