# Intellectual Capital and Knowledge Management

©Karl-Erik Sveiby 9 April 1998, updated April 2001. All rights reserved.

A term is best defined by its use, and therefore it is probably still correct to regard Intellectual Capital (IC) and Knowledge Management (KM) as twins - two branches of the same tree.
Tom Stewart Fortune, has tracked the first to use of the term "Intellectual Capital" to GR Feiwel in The Intellectual Capital of Michael Kalecki, 1975) attributed to John Kenneth Galbraith, who in a letter to economist Michael Kalecki 1969 wrote:
I wonder if you realize how much those of us in the world around have owed to the intellectual capital you have provided over these past decades.
It is Tom Stewart who in his June 1991 article Brain Power - How Intellectual Capital Is Becoming America's Most Valuable Asset, brings IC firmly on to the management agenda. He defines IC in his article as: the sum of everything everybody in your company knows that gives you a competitive edge in the market place.

The first use of the term is thus to describe the dynamic effects of individuals´ intellect. What caught the attention of managers (and management consultants) is that Tom Stewart makes IC the attribute of an organisation. Leif Edvinsson, Skandia, and Pat Sullivan define it in European Management Journal (1996 vol 14) as: Knowledge that can be converted into value. And in Laurence Prusak´s, Ernst & Young (later IBM Consulting), definition IC becomes even more "packaged". He defines it in Klein & Prusak 1994, Characterizing Intellectual Capital, as: Intellectual material that has been formalized, captured and leveraged to produce a higher-valued asset.
In Sweden a "Community of Practice" in measuring "Knowledge Capital" and Intangible Assets was born in 1988 out of the Swedish language work of Sveiby (ed. 1988): The Invisible Balance Sheet (available in English translation as download from this website). Edvinsson combined Sveiby's work with Kaplan&Norton's Balanced ScoreCard when he developed the first Skandia supplement on Intellectual Capital in 1994. A detailed history of the Intellectual Capital Concept has been written by Patrick H. Sullivan. (Available as download from this website).

Both Skandia and Ernst & Young emphasize the static properties of knowledge, that is: inventions, ideas, computer programs, patents, etc., as Intellectual Capital. Edvinsson & Sullivan also include human resources, Human Capital, but emphasize (ibid. p358) that: it is clearly to the advantage of the knowledge firm to transform the innovations produced by its human resource into intellectual assets, to which the firm can assert rights of ownership. One major task of IC managers is to transform human resource into intellectual assets.
The origins of the term "Knowledge Management" are more obscure and have not been properly researched. A couple of papers using the word "Knowledge Management" in the titles emerged in Europe around 1992-1994 authored by researchers at CIBIT in Holland (notably by Rob van der Spek (1994 Towards a Methodology for Knowledge Management), who writes: Knowledge Management consists of managerial activities that focus on the development and control of knowledge in an organisation to fulfll organisational objectives. The paper describes knowledge objects and emphasises the technology impact on information content management. The early writings by US authors around 1994 also regards knowledge as objects and are inspired by the emerging Internet.

The Swedish language origins of Knowledge Management are from the book Sveiby (1990): Kunskapsledning. (Eng. Knowledge Management), The definition offered is in translation: A way of seeing the world and the organisation, thus an understanding of KM as a perspective on organisation theory inspired by epistemology. (Kunskapsledning is available as download in Swedish language only).

The Japanese origins of Knowledge Management date back to the writings of Ikujiro Nonaka since the mid 1980's, who in his seminal work (1995) The Knowledge-Creating Company, describes how Japanese firms innovate by harnessing the sharing of knowledge in both its explicit and tacit forms. His coauthor has written an article describing the Japanese roots, (available as download from this website).

If we are looking for differences they can be found in how the words trigger off different connotations: IC is static and needs a verb to describe what managers can do with it: like managing IC or improving IC. Consequently we have seen the birth of concepts such as Intellectual Capital Management and Intellectual Capital Audit. KM is already active, in that it contains a verb. However, the "Management of Knowledge" is very abstract and the notion is an unfortunate oxymoron. I prefer to define KM as: The Art of Creating Value from Intangible Assets. "Value" being both financial and non-financial.

People actively using "Intellectual Capital" in their work seem more active in measuring, auditing and valuing issues and in "capturing" knowledge. People actively using "Knowledge Management" seem to fall into two "tracks" depending on their understanding of what "knowledge" is: as a dynamic process or as a static object. (Read more about the two tracks of Knowledge Management). Depending on how they understand what knowledge is and their aims both IC and KM actors thus emphasise either the static or the dynamic properties of knowledge.

Skandia's taxonomy for IC is basically the same as in the Intangible Assets Monitor, because they are from the same origins, (read more about the Swedish origins), but Skandia has grouped them slightly differently and has added one more level containing two notions "Innovation Capital" and "Process Capital". The two additions unfortunately makes the Skandia framework theoretically inconsistent and at odds with the original framework, because both are processes (dynamic), whereas the other notions are static.
A comparison of Skandia's taxonomy and mine is found below:

## Intellectual Capital (Skandia)
## Structural Capital | ## Human Capital
### Customer Capital | ### Organisational Capital |
Innovation Capital | Process Capital

## Intangible Assets (Sveiby)
## External Structure | ## Internal Structure | ## People's Competence

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