# Intellectual Capital Explained: Types, Measurement, and Business Value

## What Is Intellectual Capital?

Intellectual capital involves [human](https://www.investopedia.com/terms/h/humancapital.asp), structural, and relationship capital. It consists of employee expertise, organizational processes, and proprietary information. A highly valuable asset, it can play a role in developing a [competitive advantage](https://www.investopedia.com/terms/c/competitive_advantage.asp) and improving business outcomes for a company. Intellectual capital can be challenging to measure, and there's no one standard for its measurement across companies and industries.  

### Key Takeaways

*   Intellectual capital is a critical asset that encompasses the knowledge, skills, and proprietary information that provide companies with a competitive advantage and contribute to their overall success.
*   Despite its importance, measuring intellectual capital is challenging due to its intangible nature, and there are no universally accepted standards for assessment.
*   Intellectual capital is divided into three main types: human capital, which includes the knowledge and experience of employees; relationship capital, which involves an organization's interactions with stakeholders; and structural capital, which comprises company policies and organizational culture.
*   The growth of intellectual capital can significantly enhance a company's value and is often achieved through employee development, innovation, and strategic hiring processes.
*   As industries become more reliant on technology and innovation, intellectual capital increasingly plays a pivotal role in maintaining a competitive edge in the market.

## Analyzing the Components of Intellectual Capital

Intellectual capital is a [business asset](https://www.investopedia.com/terms/b/business-asset.asp), although measuring it is a very subjective task. As an asset, it is not booked on the balance sheet as "intellectual capital"; instead, to the extent possible, it is integrated into [intellectual property](https://www.investopedia.com/terms/i/intellectualproperty.asp) (as part of [intangibles](https://www.investopedia.com/terms/i/intangibleasset.asp) and [goodwill](https://www.investopedia.com/terms/g/goodwill.asp) on the balance sheet), which in itself is difficult to measure.

Companies invest time and resources in developing management expertise and training employees to enhance the enterprise's "mental capacity." Although hard to quantify, this [capital](https://www.investopedia.com/terms/c/capitalemployed.asp) helps the company by adding long-term business value.

## How to Assess Intellectual Capital

Various methods measure intellectual capital, but no uniform standard exists across industries. For example, the [balanced scorecard](https://www.investopedia.com/terms/b/balancedscorecard.asp), which is an industry performance metric, measures four perspectives of an employee as part of its efforts to quantify intellectual capital. The perspectives are financial, customer, internal processes, and organization capacity.

On the other hand, the Danish company Skandia considers the transformation of human capital into structural capital as the mission of intellectual capital. The company has designed a house-like structure with financial focus as the roof, customer focus and process as the walls, human focus as the soul, and renewable and development focus as the platform to measure intellectual capital.

Due to its vague nature, intellectual capital is also called intangible assets and environment.

## Categories of Intellectual Capital Explained

Intellectual capital is typically divided into three categories: human, relationship, and structural capital.

Human capital includes all of the knowledge and experience of employees within an organization. It consists of their education, life experiences, and work experience. It can be increased by providing training.

Relationship capital encompasses all of the relationships that an organization has, which include its employees, its suppliers, its customers, its [shareholders](https://www.investopedia.com/terms/s/shareholder.asp), and so on.

Structural capital refers to the core belief system of an organization, such as its [mission statement](https://www.investopedia.com/terms/m/missionstatement.asp), company policies, work culture, and its organizational structure.

## Real-World Examples of Intellectual Capital

Examples of intellectual capital include the knowledge that a factory line worker has developed over many years, a specific way of marketing a product, a method to cut downtime on a critical research project, or a mysterious, secret formula (e.g., [Coca-Cola](https://www.investopedia.com/financial-edge/1012/the-evolution-of-the-coca-cola-brand.aspx) soft drink). A company can also bolster its intellectual capital by hiring qualified individuals and process experts who contribute to its bottom line.

For example, a mechanic graduates from technical school and starts work at an automobile manufacturer. Their intellectual capital consists of the knowledge they learned at school. After one year on the job, their intellectual capital has increased by the experience they have gained through their job and the specific application of their knowledge. After two years, the mechanic is enrolled in a training program that focuses on new technology and increased efficiency. The mechanic's, and therefore the company's, intellectual capital has increased further.

As technology and process improvements become more of a differentiating factor within modern companies, intellectual capital becomes a greater factor in achieving success in a competitive marketplace.

## The Bottom Line

Intellectual capital is a key business asset that can provide a competitive advantage that's tied to employee expertise and organizational processes. Three categories of intellectual capital are human capital, relationship capital, and structural capital. By investing in its human capital and enhancing organizational processes, a company can boost its intellectual capital and contribute to its long-term and growing business value.

> **Article Sources**
>
> 1.  Capital Intellectual. "Developing Intellectual Capital at Skandia." Page 372. Accessed Jan. 14, 2021