Knowledge Capital Definition

What Is Knowledge Capital?

The term knowledge capital refers to 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. A company's knowledge capital depends on the skills and talents of its workers, which is what makes it an intangible asset. Knowledge capital provides companies with a comparative advantage over their competitors.

Key Takeaways

  • Knowledge capital is the value of an organization made up of its knowledge, relationships, learned techniques, procedures, and innovations. 
  • Knowledge capita is intangible, provides great value for a company, and gives it a competitive edge over rivals.
  • Human capital, relational capital, and structural capital are three components of knowledge capital.
  • Knowledge capital requires a great investment of time and money because it depreciates.
  • Companies can invest in knowledge capital through training, education, and innovation.

Understanding Knowledge Capital

When people hear the word capital, they tend to think of money. While that may be true to some degree, the term means more than just dollars and cents. The term capital is a broad one that is used to describe anything that provides value to the owner. This includes cash as well as physical property (real estate, machinery, precious metals), and assets like knowledge.

Knowledge capital, which is also called intellectual or knowledge-based capital, is anything of value that results from people's experience, skills, knowledge, and learning within an organization. Therefore, it doesn't rely on the physical effort of its machines or other equipment. As such, this form of capital has immeasurable value and cannot be quantified. This is why it's considered an intangible asset, which is one whose value cannot be touched or measured.

As noted above, knowledge capital largely depends on the skills and talents of individuals. This gives companies an edge over their competition. Organizations with high knowledge capital may be more profitable or productive compared to those 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.

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.

Companies must encourage their employees to share their skills and talent in order to fully exploit their knowledge capital.

Special Considerations

Even though it may not be a physical asset, knowledge capital still requires a significant amount of investment. This means that companies may need to invest in the following in order to improve their knowledge capital:

  • Hiring a diverse pool of individuals with different educational and professional backgrounds
  • Employee development, including training and continuing education
  • Research and development (R&D)
  • Innovation
  • Incentives and other benefits, such as scholarships, family assistance, and bonuses
  • Work-life balance
  • Ways to encourage and foster collaboration

Keep in mind this isn't an exhaustive list and that organizations can take many other steps to invest in and improve their knowledge capital.

Knowledge Capital Components

Knowledge capital has three main components: human capital, relational capital, and structural capital. Each category is highlighted below in more detail.

Human Capital

Human capital represents the contributions made to an organization by its employees utilizing their talents, skills, and expertise. Possessed only by individuals. human capital can be harnessed and exploited by an organization. It is not owned outright.

Human capital can disappear when an employee leaves. As such, quality organizations focus on retaining creative and innovative workers as well as working toward creating a setting where such intelligence can be taught and learned. 

It is not uncommon, though, for companies to enter into an employment contract with their employees, especially senior-level management, to protect against the loss of knowledge capital through non-competes. In the event an employee leaves the company, a non-compete agreement or clause would typically prohibit that employee from working for a competitor for a specified period of time".

Relational Capital

Relational capital is defined as the relationships between coworkers. It also includes the relationships between workers and vendors, customers, suppliers, 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.

Strong relationships help corporations and other organizations boost their competitive advantage. As such, it allows them to access information (and eases the flow of that information between individuals) and may reduce risk and the chance of error. It also gives them the opportunity to expand their customer, supplier, and resource bases.

Structural Capital

This type of capital represents the non-physical capital possessed by an organization, such as processes, methods, and techniques, that allow it to operate and enable it to leverage its capabilities. Structural capital may also include intellectual property such as databases, code, patents, proprietary processes, trademarks, software, and more. 

An organization's structural capital allows it to integrate and weave everything together into a solid, cohesive unit. As such, it encourages and promotes efficiency among all of its participants.

Knowledge capital is unlike different physical factors of production, such as land, labor, and capital. That's because it is based on the skills that employees share with each other to improve efficiencies rather than physical items.

Knowledge Capital Uses

For any business to be successful, it must effectively and efficiently harness and exploit the potential of its 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 exist 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 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 the forms that knowledge capital takes. 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 the 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 also went into some of the food we eat and the tools we have at our disposal, such as the formula for Coke or the invention of the smartphone.

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