Intellectual Capital: The New Wealth of Organizations

by Thomas A. Stewart.
New York, Doubleday/Currency, 1997.

Reviewed by Richard Kade

Since the field of "business" exists between the penumbra of art and science, the topic of intangible assets subsumes greater interest. Three books have been published this year, all titled "Intellectual Capital." Of them, the best is Thomas Stewart's.

Much of the material will be familiar to readers of Stewart's columns in "Fortune". The first edition has no index but the writing style makes this work such quick reading that this deficiency nearly goes unnoticed. The material is rich in wisdom, spanning Plato to John-Paul II, and humor from such diverse sources as Sid Caesar, Abraham Lincoln, Robert Frost, Charles Darwin and Thomas Edison.

The book is divided into three major parts. First is the "Information Age: Context" which is followed by "Intellectual Capital: Content," "The Net: Connection" and, finally, an appendix which, although replete with formulae, is anything but dry. An exchange between King Louis XIV: "Is it a revolt?" and Rochefoucauld --- "No, Sire, it is a revolution." --- begins the first part, a discourse on the knowledge revolution and its second-order effects. Olds, Ford, the Dodge brothers and their rivals "thought they had improved the horse ... [never] knowing that the automobile would fill the countryside with suburbs --- which, in turn, created thousands of jobs building roads and houses, making lawn mowers, selling tulip bulbs, and delivering pizza." Similarly we can now scarcely begin to see how "informating" alters organizations.

A discussion of Deming's methodologies which developed into "just-in-time delivery," traces the logical economic evolution into such "virtual reality inventory" enterprises as CUC International. Its CEO, Walter Forbes, explains: "We stock nothing, but we sell everything." All this sets the stage for the end of obsolete corporate pyramids of control whose management is superseded by those taking ownership of their destinies.

The second part on intellectual capital is an extended examination of the quest for the "hidden treasure": human capital, structural capital (optimizing knowledge while being aware of the dangers of overinvesting in it) and customer capital, the pursuit of which leads to information wars and alliances. Here the tone is set with an analogy: Plato, likening knowledge, learning and discovery "in the mind of each man" to "an aviary of all sorts of birds --- some flocking together apart from the rest, others solitary, flying anywhere and everywhere ..." in what almost becomes a "pedal-point."

We are led through a system of quantifying "passive assets" starting with patents. Dow Chemical Corp. figures that over ten years it will save about $50 million in tax, filing and other maintenance costs alone and, far better, increase annual revenue from licensing patents from $25 million in 1994 to $125 million by the year 2000. Along with this come concrete definitions of "intellectual capital" and its constituent components.

The largest portion of this section on intellectual capital --- structural capital --- rounds out this main body of the book. Both Peter Drucker and Leif Edvinsson concur in the view that structural assets may be more important than the intellectual assets. "The organization, like a blast furnace that converts iron and coke into steel, concentrates, processes and reifies knowledge work. The entrepreneur and inventor are pure human capital whereas the business person is something else. Thus Thomas Edison, when he founded the company that became General Electric, turned human capital into something structural." The experience of Hewlett-Packard shows how a profound understanding of "market-driven knowledge management" and the "physics" of pushing and pulling information are leveraged through an internal charge-back system to make those benefiting from the value of knowledge pay for the costs. For H-P, the most powerful of all bureaucracy busters is the market.

The final part of this section centers on the "intangible value chain" and the dynamics of innovating with customers. Collaborations between Alcoa and Audi and especially between 3M and its customers' customers demonstrate the rewards of knowing the customers' business. A vital passage underscoring this reality concerns internally preoccupied organizations speaking of "internal customers." Stewart points out there "is no substitute for the real thing. Rather than encourage colleagues to treat each other like customers, get them out to mingle with the genuine article."

The final section, "The Net" considers the likely effects of the Internet and Web on commerce, education, communications and everything in between. The earlier "bird pedal-point" of Plato has now transformed into a "leitmotif" --- reminiscent of Escher's "Liberation" (which can be seen at http://www.cs.utah.edu/~dmcallis/pic/Escher/escher6.gif) --- as Stewart recalls Victor Hugo's observation that the printing press freed mankind of the burden of inscribing "the great book of humanity" in stone. "In the days of architecture thought became a mountain and boldly possessed itself of an age or a place. Now it becomes a flock of birds that scatter themselves unto the four winds of heaven and occupy at once every point of air and space ... It is possible to demolish a pile; but how can we destroy omnipresence?"

The central chapter of this part starts with the question "What is the management structure of a flock of birds?" The answer, from scientific studies of geese in V formation, is that "the leader has no special authority ceding his place if he tires or the flight changes direction." In response to a stimulus --- a breeze, a gunshot --- "birds in a flock turn within one-seventieth of a second of one another --- faster than their individual reaction time." There is "no leader, no chain of command, no span of control. There is instead a sort of shared brain, a loosely conjoined network of relationships and impulses." Similarly, in companies whose wealth is intellectual capital, networks replace hierarchies. Now webs, nodes, clusters and flocks supplant pyramids, bosses, departments and troops. The happy ending is that the "old boy network" of yesteryear is finally extinct.

Copyright 1997, Xerox Corporation. For exact wording on the "Reprinted/Reposted by permission of" contact Dr. Giuliana Lavendel at 650/812-4040.