Knowledge Capital

What Is Knowledge Capital?

Knowledge capital is the intangible value of an organization made up of its knowledge, relationships, learned techniques, procedures, and innovations. In other words, knowledge capital is the full body of knowledge an organization possesses.

Having employees with skills and access to knowledge capital puts a company at a comparative advantage to its competitors. Knowledge capital, sometimes referred to as intellectual capital, is considered an intangible asset.

Rather than relying on the physical effort of its machines and other equipment, a company's knowledge capital is dependent on the skills and talents of its workers. This is what makes it an intangible asset with intangible value, or assets that we cannot touch whose value we cannot measure.

Understanding Knowledge Capital

Knowledge capital is anything of value that results from people's experience, skills, knowledge, and learning within an organization. This capital has immeasurable value and cannot be quantified. As such, it gives a company a competitive advantage over its rivals.

Knowledge capital is unlike the physical factors of production—land, labor, and capital—in that it is based on skills employees share with each other in order to improve efficiencies rather than physical items.

Organizations with high knowledge capital may be more profitable or productive compared to organizations with lower knowledge capital. Businesses develop knowledge capital by encouraging employees to share information through white papers, seminars, and person-to-person communication. When this capital is pooled together and shared, the results can be worth a great deal.

In order for companies to fully exploit their knowledge capital, they must encourage their employees to share their skills and talent.

Knowledge capital is important because it reduces the odds that a company will have to reinvent the wheel each time a particular process is undertaken. This is because its employees have access to documents detailing the necessary steps, along with access to personnel who have undertaken similar activities. Even though it may not be a physical asset, knowledge capital still requires a lot of investment.

Knowledge Capital Components

Knowledge capital has three main components:

  • Human capital: The contributions made to an organization by its employees utilizing their talents, skills, and expertise. Human capital is possessed only by individuals, but may be harnessed and exploited by an organization. It is not owned outright. Human capital can disappear when an employee leaves so quality organizations are ones that focus on retaining creative and innovative workers, as well as work toward creating a setting where such intelligence can be taught and learned. 
  • Relational capital: The relationships between coworkers as well as those between workers and suppliers, customers, partners, and collaborators. Relationship capital also includes franchises, licenses, and trademarks as they have value only in the context of the relationship they have with customers.
  • Structural capital: The non-physical capital possessed by an organization—such as processes, method, and techniques—that allow it to operate and enable it to leverage its capabilities. Structural capital may include intellectual property such as databases, code, patents, proprietary processes, trademarks, software, and more. 

Key Takeaways

  • Knowledge capital is the value of an organization made up of its knowledge, relationships, learned techniques, procedures, and innovations. 
  • Knowledge capital, also referred to as intellectual capital, is intangible, provides great value for a company, and gives a competitive edge over rivals.
  • This type of capital has three components: human capital, relational capital, and structural capital.
  • Like any other asset, knowledge capital requires a great investment of time and money because it depreciates.

Using Knowledge Capital

For businesses to be successful, they must effectively and efficiently harness and exploit the potential of their knowledge capital. This requires management to be aware of and work toward efficient knowledge management which is the act of creating, disseminating, managing, and utilizing the talents and knowledge that exists in an organization.

Another important caveat for companies with respect to their knowledge capital: It's an asset in need of constant investment of both money and time because, like everything else, knowledge capital depreciates and is not finite. People need to be given the opportunity to continually improve and upgrade their skills in order to maintain their talents. The more a company invests in its knowledge capital, the more value it holds.

By continuing to invest in knowledge capital, companies can expand their research and development (R&D) operations, create new business models, increase their patents and designs, and continue to innovate.

Examples of Knowledge Capital

Although it may not be a physical asset, we can still determine what forms knowledge capital takes. For example, it may take shape through the leadership of an executive or management team member. Having the confidence and drive to keep people moving toward a common goal is a very valuable asset for any company.

Another common form of knowledge capital is practical knowledge. Having someone who is well versed in coding and programming, for instance, may be valuable to a small internet startup.

Knowledge capital leads to some of the biggest innovations we know today. Consider what intellectual prowess and know how that went into developing some of the world's famous logos such as McDonald's golden arches, the Nike swoosh, or even the Apple logo—an apple with a bite out of it. Considerable knowledge has also gone into some of the food we eat and the tools that we have at our disposal, such as the formula for Coke or the invention of the smartphone.