Intellectual Capital – The Foundation of Corporate Value
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Many analysts would agree that intellectual capital is at the heart of corporate value. It is the foundation for the market dominance and continuing profitability of leading corporations. Intellectual capital comprises intellectual property (IP) held by a corporation, including patents, trademarks, copyrights, and trade secrets, as well as intangible assets including at least reputation or goodwill, brand recognition, product designs, and market positioning.
A company’s value is highly associated with its commercialization of products and solutions based on owned or licensed patents in the markets served, as well as the company’s resulting position relative to competitors in its market space. A company’s growth prospects within its market space often depend on product positioning, the underlying protection afforded by its patent portfolio, and brand recognition.
The strategic value of a company’s products and the underpinning intellectual property is supported by strong branding and reputation assets in relation to the competitive environment in which it may operate. Thus, a cornerstone of corporate value is the marketable package of intellectual capital owned or licensed by the company comprising at least patents, trademarks, copyrights, trade secrets, reputation, brand, and market positioning.
The market value of intellectual capital equates primarily to the present value of the future economic benefits of ownership or license within the operating context of the owner or licensee. That is, the market value is driven by the expected cash income that can be derived from future exploitation of the intellectual capital by the owner or licensee. Alternatively the market value may be driven by prospective purchasers (e.g., system integrators or manufacturers) that can leverage IP related products, reputation, brand, and product positioning to help secure greater market share. The expected cash income that could be realized by prospective purchasers may comprise revenues generated directly from the sale of the IP related products, systems, and solutions, or further comprise revenues derived indirectly from these products, systems, and solutions as a result of their incorporation into a larger commercial solution sold in a purchaser’s market space.
Key factors that drive corporate value are the amount of future income expected, the likelihood of realizing that income, and the life and pattern of the income stream expected. All of these factors are highly influenced by the composition of a company’s intellectual capital including patents, trademarks, copyrights, trade secrets, manufacturing knowhow, product designs, drawings, specifications, supplier lists, product reliability, and operational importance to related solutions and associated cash flows.
Strength and enforcement of intellectual property rights, commercialization track record, product acceptance in the market space, brand recognition, and low volatility in revenue or royalty all contribute significantly to value. Clearly formation, protection, and management of intellectual capital are essential for success in driving and protecting corporate value, and must be an important focus for senior corporate executives. A business focused IP strategy and effective processes for capturing corporate innovation and creating intellectual property are primary starting points.
