I’ve created a specific page for information on President Hinkley’s Oppose Evil article for friends and family.
A lot of truth in this article, but I couldn’t help but think about the one time I’ve tried to use LinkedIn.com and received an amazing response to a question that I had. It worked for me, but then, I’ve only used it once.
Hey, Skype released a client for OS X. These guys are moving in providing free Internet telephony for all platforms.
I’ll never remember these measures when I return overdue Intellectual Capital to the Library today so I’m recording them here:
Measures of the Whole
Market-to-book ratios: If Microsoft is worth $85.5 billion and its book value is $6.9 billion, then its intellectual capital is $78.6 billion. Three problems: 1) The stock market is volatile. 2) Evidence that book and market values are understated because acquired companies cost a premium over market capitalization. 3) While it’s nice to say Microsoft has $78.6 billion in Intellectual Capital, so what? What can I do with that info?
Tobin’s Q: Compare the cost of asset replacement with the market value of the assets. The closer to 2, the more you can command a price. You have something they don’t have. That could be a monopoly or that could be your intellectual capital.
Companies Fixed Assets and add back accumulated depreciation and account for inflation. This will show you what’s happening to a company over time. How well are they using their assets? A measure of Intellectual Capital.
Calculated Intangible Value: An elegant way developed by NCI Research. They wanted a way to convince to put money into businesses with very few tangible assets. This is a way to calculate the value of a brand. For example with Merck:
1. Calculate average pretax earnings for 3 years. $3.694 billion.
2. Go to the balance sheet and get the average year-end tangible assets for 3 years: $12.953 billion.
3. Divide earnings by assets to get the ROA: 29 percent.
4. For same 3 years, find the industry average ROA (for pharmaceuticals, 10 percent – if company below average -> STOP NCI method won’t work)
5. Calculate the “excess return.” Multiply the industry-average ROA (10 percent) by the company’s average tangible assets ($12.953 billion) to understand what the average drug company would do with the assets. Now subtract that from this company’s pretax earnings from step 1 ($3.694 billion). We get $2.39 billion.
6. Pay Uncle Sam. Calculate the three-year-average income tax rate, and multiply this by the excess return. Subtract the result from the excess return, to get an after-tax number. This premium is attributable to intangible assets. For Merck (average tax rate:31 percent), that’s $1.65 billion.
7. Calculate the net present value of the premium. You do this by dividing the premium by an appropriate percentage, such as the company’s cost of capital. Using an arbitrarily chosen 15 percent rate, that yields, for Merck, $11 billion.
That would be Merck’s calculated intangible value. This CIV permits company-to-company comparisons using audited financial data. A weak or falling CIV might hint that you’re spending too much on brick and mortar and not enough on R&D or brand-building. A rising CIV can help show that a business is generating the capacity to produce future cash flows, perhaps before the market–or budget committee–has recognized it. Over time, Tobin’s q out to be parallel to CIV. “Knowing a company’s CIV could help you judge whether a low price-to-book ratio reflects a fading business, or one that’s rich with hidden value that isn’t yet reflected in the stock.”
Human Capital Measures
Employee Attitudes: Correlation between happy employees and strong financial performance. Though not proven as cause, people who feel they are learning, needed, and useful will be more productive than people who are idle and uncertain of their role in the company’s success; they’re also likely to treat suppliers, customers and each other better.
So conduct employee surveys but be careful that some just generate what’s on people’s minds at the moment, which can be useful data.
Tenure, Turnover, Experience, Learning: Celemi International measures using the following:
1. Average years in profession.
2. Turnover among experts.
3. Senority among experts.
4. Value-added per expert and per employee.
5. Percentage of customers who are “competence-enhancing” or challenge the company to learn more.
6. Rookie raio (percentage of employees with less than two years experience).
1. Among the many skills possessed by your employees, which do customers value most? Why?
2. Which skills and talents are most admired by your employees? What accounts for any difference between what customers value and what employees value?
3. What emerging technologies or skills could undermine the value of your proprietary knowledge?
4. Where in your organization do high-potential managers most want to be assigned? Where do they least want to work? How do they explain their preference?
5. What percentage of managers have completed plans for training and developing their successors?
6. What percentage of all employees’ time is spent in activity of low value to customers? What percentage of expert employees’ time is spent in activity of low value to customers?
7. When competitors are hiring, do they hire from you?
8. Why do people leave you to accept jobs elsewhere?
9. Among experts in your labor market–including headhunters–what is your company’s reputation vis-a-vis its competitors?
The Knowledge Bank: Alan Benjamin, former director of SEMA group, one of Europe’s leading computer service companies, developed a measure of the value of the knowledge bank of a company. This is what Benjamin does:
1. Treats capital spending as an expense, not an investment.
2. Calculates the employee’s salary seeding the future as an investment and book it as capital spending.
3. Conservatively estimates the value added by R&D
4. Draws a new bottom line and calculates the knowledge bank which the company can call on in the future.
Sales $2.7 million
-Capital Spending $100,000
-Labor $1.5 million
Surplus would be about $600,000
Deferred Labor (added to knowledge bank): + $800,000
Expensed Labor (no residual value): -$700,000
Sales $2.7 million
-Capital Spending $100,000
+R&D value added $40,000
Surplus would be about $1,540,000
($600,000 cash and the rest in banked knowledge) Determining the bank is the first step. Then we find out our return-on-human-capital (knowledge bank divided by profit) which should be lower than ROA conventionally measured.
Structural Capital Measures
To picture this, you need measures of the value of accumulated stocks of corporate knowledge, and measures of organizational efficiency (the degree to which the company’s systems augment and enhance the work of its people rather than obstruct them).
Valuing Stocks of Knowledge: Anson considers structural capital in 3 groups: 1) a technical bundle (trade secrets, formulas, proprietary test results, etc.) 2) a marketing bundle (copyrights, corporate name and logo, warranties, advertising, package design and copyrights, trademark registrations, etc.) and 3) a skills and knowledge bundle (databases, manuals, quality control standards, asset managment processes, security systems, business licenses, noncompete clauses, proprietary management information systems, etc.) Three basic tests to the value of an asset: Does it differentiate your product or service? Does it have value to someone else? Would someone else pay a fee for it? Price the assets not by cost but by their comparable value in your industry. Then rate the relative strength of your asset versus the comparables using the scorecard called the Valmatrix. (0-5 scale, 100 total possible points, breadth of product line, barriers to entry, etc.)
Working Capital Turns: The ability to substitute inventory for information. Like Dell Be careful to measure everything. The goal is to see how much you save compared to others who have more inventory.
Measuring Bureaucratic Drag:
Suggestions made versus suggestions implemented.
Ratio between revenues and SG&A costs.
Set-up times, minimum profitable lot sizes, etc.
Measuring the Back Office: Value added=Change Don’t write 2X2X2, write 2
Customer Capital Measures
Customer Satisfaction: Loyalty (retention rates), increased business (share of wallet), and insusceptibility to your rival’s blandishments (price tolerance).
Measuring Alliances: Savings for both parties from shared processes such as inspection and electronic data interchange, figures on inventories for both buyer and seller and availability all help establish the value of intimate relationships between you and your customers or your suppliers. Keep track of your customers’ financial strength and growth and your share of their business: If you are a key supplier to a strong customer, you have a valuable asset.
What’s a Loyal Customer Worth?: What is the net present value of your customer base? How much is a new customer worth? How much is it worth to keep an old one?
1. Meaningful period of time over which to do the calculations.
2. Calculate the profit your customers typically generate each year you keep them. Both costs and profits. If possible, segregate this number into age, sex and other useful information.
3. Then chart the life expenctancy.
4. Once you know the profit per customer per year and the customer retention figures, calculate the net present value of a customer. Pick a discount rate–if you want a 15 percent annual return on assets, use that, since customer capital is an asset. Apply the discount rate to each year’s profit, adjusted for the likelihood that the customer will leave. In year one, the NPV will be profit / 1.15. In year n, the last year in the period you chose, the NPV is the nth-year’s profit/ 1.15n. The sum of years 1 through n is how much your customer is worth–the net present value of all the profits you can expect from his tenure: In effect, it’s what someone else would pay to get the customer.
You can use this information to determine how much it costs to acquire new customers. This is invaluable information.
Keep it simple. No more than three measures for each.
Be strategic in your measures. Measure those things that give you your competitive edge.
Measure activities that produce Intellectual Wealth.
“Networking is lots more than a metaphysical idea, a technological phenomenon, or a hot industry. It is the most important development in management since DuPont, General Motors, and others invented the modern corporations–with its headquarters officers and staff, multiple divisions, and functional departments–before World War II. Where once there were pyramids, bosses, departments, troops, now there are webs, nodes, clusters, flocks. In companies whose wealth is intellectual capital, networks, rather than hierarchies, are the right organizational design.”
–Thomas A. Stewart, Intellectual Capital: The New Wealth of Organizations
I think FamilyLearn, with our efforts with Personal Historians, is moving to a networking model.
Epidemics can rise and fall in one dramatic moment. That dramatic moment is the Tipping Point. There are social and viral epidemics. This book is concerned with the epidemics spread by people.
There are three rules to the Tipping Point.
1. The law of the few (Connectors, Mavens and Sellers)
2. The stickiness factor.
3. The power of context.
1. The law of the few
Paul Revere, on his famous ride informing “The British are coming!,” had a partner and fellow revolutionary, William Dawes, who rode with him on a separate route. Dawes headed for Lexington through the towns west of Boston, but he didn’t successfully gather the support that Revere did. Everywhere Revere went, his initial word to the towns spread like wildfire. Paul Revere, says Gladwell, was a Connector and a Maven. His message, the same message as Dawe’s, had far more impact because of it.
- Know everyone.
- Have unusual gift for rapidly making new friendships and acquaintances.
- Gladwell took 200 random names from the phonebook and asked people how many surnames were shared by people they knew. Connectors said 80-100+. Average was 21. My response was 26 :). I’m obviously not a connector yet.
- Roger Horchow airplane ride convinced Gladwell that some just have a gift.
- Important because of the sheer quantity of people they know.
- These folks know everything about a particular area.
- Airwalk hired a fashion Maven, on the edge with everything hip, to “Tip” their shoes into a larger market moving the company from $15 million to $175 million in two years.
- Mavens are valued for what they know. They are trusted by everyone because everyone knows that they know.
- Most likely to pass around deals and coupons.
- They are not persuaders.
- These people have an innate ability to persuade.
- ABC’s polls always favored Reagan more than other candidates because Peter Jennings unknowingly lighted up when he spoke of Reagan. He had the ability to persuade even though people didn’t know they were being persuaded.
2. The Stickiness Factor
An epidemic will grow or stop growing because of how much it sticks. The most popular children shows on TV: Seasame Street and Blues Clues demonstrate the importance of the stickiness factor.
- Seasame Street The folks at Seasame Street found the show on the premise that keeping a child’s attention was equivalent to them learning. They saw the success of commercials and patterned Seasame Street in short, 3-4 minute segments. They almost failed because the childhood experts told them not to combine realty with the muppets. But adding Big Bird to the street kept children’s attention far better. They determined the attention level of each program after they developed the distractor system to which was a slide show of interesting images that would compete with the program for attention. Whenever the children looked at the distractor, they assumed that part of the show wasn’t holding attention. They shot for 90% attention. Seasame Street was a huge success because it was sticky. They later learned from eye movement studies how to increase the amount of learning that took place on the show. If the muppets were too distracting, the children only paid attention to them.
- Blues Clues This show out did Seasame Street because they took 30 more years of child research and improved the show. Short segments aren’t as successful as story lines for children. Children love interactivity. They also love repetition. Blues Clues repeats the same show 5 times, but has enough depth that children love to watch it over and over. It may be the stickiest children’s show of all time. It beat Seasame Street because it focused on children and not on adults like Seasame Street.
3. The Power of Context
- New York Crime Example of the New York drop in crime rate because they repainted the subway cars faster than the gangs could grifiti them. They also put people in jail for trying to get onto the subway free or peeing in the streets. They stopped the little things and the murder rates and horrible crime dropped 60 percent in the area. Bernie Goetz drove these changes. Soon after New York put him in charge of the police department for the entire city and he turned the city crime rate around by 40 percent.
- The magic number of 150 In the army, in hunter gatherer societies, in the gore corporation and in Methodist churches (Divine Secrets of Ya-Ya Sisterhood moves to the Bestseller list overnight in San Francisco and the book clubs), 150 people tend to be the largest size you can get a group and have it actually act together as one voice, in unity without more complex structures of organization
Tipping Points can be caused or prevented. AirWalk shoes orchestrated a Tipping Point for their shoes. They can be deadly. Micronesian suicide rates show a Tipping Point among the teenage boys. Teenage smoking, in spite of the efforts to fight it, is still on the rise even though teens know that it’s not good for them. Teens choose to smoke to rebel and be cool like people they see smoking. They don’t want to hear adults tell them it’s bad for them. Some think people some smoke because it provides a drug to deal with depression. Treating depression may reduce smoking problems. There is a point when an occasional smoker “Tips” and becomes a chain smoker when they have sufficient levels of nicotene. Gladwell thinks it would be possible to stop the Tipping Point from moving to chain smokers by reducing the nicotene content so that they can never get enough nicotene.
Interestingly, in the afterword, Gladwell says the difficult challenge to cause a Tipping Point is to find the Mavens. They are more difficult to find. When Ivory soap places an 800 number for questions on their soap, it’s a Maven trap. No one but Mavens call those numbers. Connectors make it their business to find you. You don’t need to find them. Another example, Lexus, when they had to call back a large group of cars, was worried because they had marketed their perfection and reliability. They recalled the cars and while the owners waited, Lexus washed them and filled them with gas. Owners who lived 100 miles away from a shop received a visit from the mechanic at their home. Lexus even flew to one place to fix the car. This pleased the newest owners of Lexus so much. Plus these new enthusiasts were Mavens. They turned around and marketed Lexus for the company. It was the most impactful callback ever- impactful for the benefit of the company. There are ways to find the Mavens or get them to come to you.
What is happening in our world today?
What is Intellectual Capital?
How do you leverage Intellectual Capital for a company?
Information rather than manufacturing and natural resources is becoming the most important source of wealth.
Much like the changes that took place when manufacturing supplanted agriculture, the technology revolution is dramatically changing our world. What will the world be like when manufacturing is only 2 percent of our economy and information is the rest?
Ten Principles for Managing Intellectual Capital (Paraphrased)
1. You can’t own, you can only share Intellectual Capital. People choose to share it when there is incentive and a company recognizes that it’s shared.
2. Companies can create capital that can be used when the capital doesn’t leave at 5pm with the brains. This means developing communities of practice and other social forms of learning can make the knowledge less dependent on any one individual. The company should provide the locus of learning so that it will be the chief beneficiary of the learning. It doesn’t matter if it makes it to other organizations.
3. Organizational wealth is created around the skills that are (1) proprietary because no one does them better and (2) strategic because they create value for the customers that pay. Invest in the people that need these skills and minimize or automate other skills.
4. Structural capital is intangible assets that companies own. Systems for communicating knowledge and information within the company. Be careful not to let structural capital get in the way of the value to the customer. The goal is to make it as easy as possible for your customers to work with your people.
5. Structural capital serves two purposes. First to stockpile useful knowledge that will add value to the customer. Two is to speed up the flow of that information inside of the company. Make sure to have at least Yellow Pages, Lessons Learned and Competitor Intelligence.
6. Can intangibles do the work of costly physical assets?
7. Knowledge work is custom work. Mass-produced solutions won’t yield high margin profits. Special relationships are the key.
8. Every company needs to analyze the value chain of the industry it participates in and see which information is the most crucial. The closer to the customer the better.
9. Focus on the flow of information, not on the flow of materials.
10. Human, structural and customer capital work together.