Monday, January 23, 2017

Capital Markets know the value of Intellectual Capital

Intellectual Capital of a business is defined simply, in theory, as the value of the intangible assets of the business. As far as theory goes, this definition is entirely correct. But it is in practice where this definition falls woefully short.  The latest accounting standards (read IFRS compliance) require every business to report the value of its intangible assets in its balance sheet. What gets reported however is the value of the intangible assets as is recognized under the accounting standards. And this is the reason why there remains a wide gap between the actual value of intangible assets in the 
business and what is reported in the balance sheet. IFRS accounting standards are conservative by nature and define strict criteria for what can and cannot be considered as an intangible asset in the first place. 
  • The two acid tests in this regard are 
  • The intangible asset should be identifiable

The economic benefits arising from the intangible asset should be reliably measurable
It is due to this strictness that businesses act ultra conservative when reporting the value of their intangible assets. Let’s take an example to understand this better and its impact on investor’s assessment of the business.

Union Pacific Corporation (NYSE: UNP) is the largest railroad operator in the United States. Incorporated in 1969, the company operates 8500 locomotives over more than 32,000 km of railroads employing more than 42,000 people. The company hauls commodity freight such as agricultural products, chemicals and coal as well as automotive and industrial products across the length and breadth of the United States. It competes with other railroad operators as well as road and waterways based freight haulers. The company runs its operations profitably and despite the vagaries of economic cycles, it has not reported a single quarter of loss in the past 13 years that icTracker has been tracking it. This includes that period during the 2008 crisis when every other company appeared to be going down under in a hurry. We would therefore have to assume that the company has developed a deep understanding of its Customers business over a long period of time to the extent that it can forecast demand for its freight services well ahead of time. This in turn enables it to plan availability of locomotives, freight cars, rail routes and staff ahead of time. Operations personnel know the types of train configurations that are required by different type of Customers and freight. They know the routes that will deliver the freight for their Customers in the shortest possible time. They know how to configure a freight train. They know the numbers and types of locomotives that are required for the train. They know the people who can drive such a train. They know how to manage the complex process of storing and sorting wagons in freight yards. They also know how to haul the empty wagons from their destination back to the freight yard as quickly as possible in order to minimize idling of revenue generating assets. All this and other valuable knowledge is ingrained into the operations of the company that leads it to turning a healthy profit quarter after quarter. As an investor, you would naturally expect the balance sheet of the company to reflect the value of this and other intangible assets. Would it surprise you to know therefore that in the 13 years that icTracker has been tracking Union Pacific - the company has never ever reported any intangible assets in its Balance Sheet? In other words, the company believes that it has zero Intangible assets. The balance sheet of the company would have you believe that Customers pay the company purely for renting its physical assets such as its locomotives, freight cars and rail tracks.  

But investors surely know better. The balance sheet mentions the Company’s Net Worth as approximately $20bn. An icTracker valuation of its intangible assets reveals another $23bn of Intellectual Capital, pushing its Intrinsic worth to $43bn. Yet, at the time of writing this article the capital markets are valuing Union Pacific at nearly $85bn i.e. more than four times the reported book value and nearly twice its intrinsic worth. Clearly investors seem to know a hell lot more about the value of the company’s intangible assets than what is revealed in the balance sheet – which is zero. 

Tuesday, July 16, 2013

Intellectual Capital has the same connotation as Economic Moat

Economic Moat is a term that is very familiar to value investors worldwide. The legendary investor Warren Buffet is credited with having coined this term. Investopedia defines it to be the competitive advantage that one company has over other companies in the same industry. The wider the moat, the better it is for the company as it helps the company to keep the competition at bay. 

Stockopedia identifies 5 advantages that companies with wide moat hold over the competition:
  1. Intangible Assets
a.    Brands – business identities that have a positive recall in the minds of consumers
b.    Patents – exclusive rights over a product/service granted by the government to the inventor for a limited period.
c.    Regulatory approvals – licenses granted to business by the government creating barriers to entry for others
  1. Switching Costs – When a business creates high switching costs for its customers, it automatically creates a moat e.g. Banks, Credit Cards, etc.
  2. Network Effects – When a business creates a product/service that is used by everybody else, the network effect of usage of that product/service creates a high switching cost and therefore a high moat for the business e.g. pdf format for document interchange developed by Adobe Inc.
  3. Cost Advantages
a.    Cheaper Processes – Businesses that are able to do the same job using cheaper processes develop a cost advantage and hence a moat
b.    Location – Businesses that have a location advantage develop either a cost or a revenue advantage or both, and thereby develop a moat.
  1. Greater Scale or Niche
a.    Distribution Networks – A business that can influence the distribution channel to give preference for selling its products has a natural moat over its competition.
b.    Manufacturing Scale – A business can develop a moat by using economies of production scale to derive cost advantages
c.    Niche Markets – A business can also develop a moat by targeting its products and services towards niche markets.

The concept of economic moat as described above is straightforward really. Businesses that have a wide economic moat can dictate the price they can charge their customers and thus generate greater profits. It is as simple as that. The difficulty arises when we try to identify companies having wide economic moats in practice. There is no known formula for a quantitative calculation of economic moat. Hence the determination of wide moat companies remains the exclusive domain of astute investors who have a lifetime of expertise in this area. And sometimes even they get it wrong. Is there any hope therefore for the rest of us?

Let us look at the advantages enjoyed by wide moat companies once again. It is obvious that every single advantage enjoyed by companies holding a wide moat as outlined above are intangible in nature. We should therefore be able to categorize these advantages into one of the three forms of Intellectual Capital – Human, Structural and Relational. Let us run through the list and attempt that -  
  • Brands, patents and regulatory approvals are all part of the structural capital of the business.
  • High switching costs are created because of the relationships that the business develops with the Customer and the quality of the service that it provides – this is therefore an aspect of the relational capital of the business.
  • Network effects that result in high switching costs also falls in the same category – relational capital
  • Cost Advantages due to cheaper processes or location advantage are part of the structural capital of the business
  • An influence over the distribution channel is part of relational capital of the business
  • Manufacturing scale is an aspect of the structural capital of the business
  • And finally serving niche markets is another instance of relational capital of the business.

If we dig deeper, we are sure to find elements of Human Capital behind each of these capitals, since it is people ultimately that make Structural and Relational Capital work, but that is beside the point. The larger point that I want to make is that Economic moat as defined and understood by investors is nothing but a manifestation of the Intellectual Capital of the business. To confirm this correlation between Economic moat and Intellectual Capital, let us read the investors understanding of Intellectual Capital. Turning to Investopedia once again, we find that it defined there as follows:
The value of a company's employee knowledge, business training and any proprietary information that may provide the company with a competitive advantage. Intellectual capital is considered an asset, and can broadly be defined as the collection of all informational resources a company has at its disposal that can be used to drive profits, gain new customers, create new products, or otherwise improve the business.

The key point of this definition is that Intellectual Capital is an intangible asset that provides competitive advantage to the business that in turn can generate greater profits. Strikingly similar to the definition of economic moat, you will agree. The definition of these two terms establishes the qualitative correlation between them and it establishes my proposition that economic moat is a manifestation of the Intellectual Capital of the business. However to be sure, I wanted to establish a quantitative correlation as well. For this purpose, I turned to the icTracker, a web based tool that calculates and reports the Intellectual Capital of leading Indian and US businesses every quarter.

Two terms from icTracker are of particular relevance for this purpose – EVA and KB. EVA stands for Economic Value Added and is a registered trademark of Stern Stewart & Co. It denotes the money left over from the post tax net operating profit of the business after paying its cost of capital. KB stands for Knowledge Basis – a ratio of the Intellectual Capital to the total assets of the business. The ‘total assets’ of the business in icTracker is defined as the sum of the Intellectual Capital and Net Worth of the business i.e. the sum of the intangible assets and the assets on the books.  

According to the theory behind economic moat, companies with wide moat have a competitive advantage which results in greater profits. This is the equivalent of saying that companies with high amount of Intellectual Capital – higher at least than the assets listed on its books - will generate a positive EVA. In order to compare the Intellectual Capital of business of different sizes, we do not use the absolute value of Intellectual Capital (calculated by icTracker) itself. Rather we use the ratio KB which as has been said earlier is the proportion of intangible assets of the business to all of its assets. KB simply makes the Intellectual Capital of all businesses comparable. With these definitions in place we can now compare all companies in the icTracker database along two dimensions. Along the rows, we will count the number of companies that have a positive EVA or a negative EVA. Along the columns, we will count the number of companies that have a KB greater than 0.5 (indicating more intangible assets than traditional assets) or less than 0.5. The following table shows the number of Indian companies split along these two dimensions for the quarter ended March 2013.
KB < 0.5
KB > 0.5
EVA < 0
131 (40%)
50 (16%)
EVA > 0
17 (5%)
126 (39%)
There were 324 Indian companies in the icTracker database at the end of March 2013. Note that 126 of the 324 companies that have a KB greater than 0.5 are generating a positive EVA. Correspondingly, 131 of the 324 companies that have a KB less than 0.5 are generating a negative EVA. Therefore added together 79% of the Indian companies seem to be following the economic moat theory for the March 2013 quarter.

We also have two exceptions though –
  • 50 of the 324 companies have a KB greater than 0.5 but are still generating a negative EVA. In other words, these companies have a high amount of Intellectual Capital but are unable to translate that into economic profits. The possible reasons for this could either be excessive capital employed by these businesses or a higher cost of capital.
  • We also have 17 companies that are generating a positive EVA despite having a KB less than 0.5. It means that these companies are generating economic profits despite having lower Intellectual Capital. One possible explanation for the performance of these companies could be seasonal or temporary demand.
Nonetheless, companies in these two categories are exceptions to the economic moat theory.

Next I extracted the same data for the quarter ended March 2013 for US companies, which I have summarized in the table below                                  
KB < 0.5
KB > 0.5
EVA < 0
30 (21%)
23 (15%)
EVA > 0
12 (7%)
86 (57%)
There were 151 companies in the icTracker database as of March 2013. From this data we can see once again that 78% of the total 151 companies in the database follow the economic moat theory, whereas the remaining 22% fell in the category of exceptions.

The icTracker database calculates the Intellectual Capital of all leading companies in India and in the USA every quarter from March 2005 onwards. It therefore has data for every quarter for every company that it tracks for the past eight years. That is 32 quarters of rich data! Therefore I went one step further in my analysis and pulled out similar data for each quarter since March 2005, organized it along the two dimensions as above separately for Indian and US companies and then summed up the totals. My idea was to establish that my proposition holds true not only for a single quarter but also over the long term. The results are shown below for both India and the USA.

KB < 0.5
KB > 0.5
EVA < 0
2763 (29%)
1748 (18%)
EVA > 0
530 (6%)
4435 (47%)

KB < 0.5
KB > 0.5
EVA < 0
827 (17%)
796 (16%)
EVA > 0
410 (8%)
2792 (58%)

Over the long term, we can see that 76% (47 + 29) of Indian companies and 75% (58 + 17) of American companies follow the economic moat theory.

These results lead me to the conclusion that economic moat is nothing but a manifestation of the Intellectual Capital of the business. This is not to say that businesses without Intellectual Capital cannot have economic moat – clearly that is possible as we have seen in the exceptions. We also have some cases where businesses with high Intellectual Capital are not able to generate economic profits. However, the numbers of companies in these two categories are clearly a minority. When more than 75% of the most highly traded and publicly listed companies in two different and far apart geographies such as India and the USA are shown to be conforming to the economic moat theory, we have to conclude that Intellectual Capital has the same connotation as Economic Moat. In other words they mean one and the same thing. 

Friday, July 27, 2012

A proxy indicator for the Intellectual Capital of nations

I recently came across the book “Intellectual Capital of Nations” by Prof. Leif Edvinsson and Prof. Carol Yeh-Yun Lin and their associated research paper titled “National Intellectual Capital: comparison of the Nordic countries” which I downloaded from Both the research paper and the book present a comparative study by the authors on the Intellectual Capital of 40 leading nations in the world. Based on the outcomes of their study, the authors arrived at the conclusion that the Nordic region consisting of the five countries of Denmark, Finland, Iceland, Norway and Sweden has the most Intellectual Capital per capital among any other region in the world, which includes amongst others industrialized regions such as North America and Western Europe and regions of the emerging economies such as Brazil, Russia, India and China.

A comparative study of the Intellectual Capital of Nations, even though limited to only 40 countries in this study, is no doubt very useful. It provides a macro level view of how countries are managing their intangible assets compared to one another. This information can be gainfully used by multiple target audiences such as Multi National Corporations, Global Investment Funds, Private Equity and Hedge Funds, Multi lateral lending agencies such as IMF and World Bank, and many other institutions for a variety of purposes, such as for making investment decisions. In an increasingly globalized world this information can be also used to determine which countries have a relative competitive advantage over other countries. Hence the question naturally arises, how did the authors go about making this interesting comparison?

As the authors describe in their paper, they first deliberated on the dimensions for representing the Intellectual Capital of countries and finalized four dimensions viz. Human Capital, Market Capital, Process Capital and Renewal Capital. Next, using a two step filtering process, they then identified seven indicators for each of these types of Capital as follows:

Human CapitalMarket CapitalProcess CapitalRenewal Capital
Skilled laborCorporate TaxBusiness competition environmentBusiness R&D spending
Employee trainingCross-border ventureGovernment efficiencyBasic research
Literacy rateCulture opennessIntellectual Property Right protectionR&D spending/GDP
Higher education enrollmentGlobalizationCapital availabilityR&D researchers
Pupil-teacher ratioTransparencyComputers in use per capitaCooperation between universities and enterprises
Internet subscribersImage of countryConvenience of establishing new firmsScientific articles
Public expenditure on educationExports and Imports of servicesMobile phone subscribersPatents per capita

Thereafter the authors collected (perhaps painstakingly) data for these indicators for each of the 40 countries for a period of 12 years from 1994 until 2005 from the OECD database and the World Competitiveness Yearbook. Next they normalized the data where required and added one more dimension for Financial Capital to the existing four, represented by a normalized form of GDP per capita. They finally aggregated and tabulated their findings, a summary of which is presented below:
NoCountryIC ScoreIC rankIC+FC ScoreIC+FC rank
5United States27.64537.525
18New Zealand22.831832.1918
19United Kingdom22.51932.1119
21South Korea20.042129.2821
28Czech Republic17.982827.1427
31South Africa15.413123.7831
* IC = Intellectual Capital, FC = Financial Capital

While I consider this work as ground-breaking, two thoughts have troubled me since. Why has anyone not followed up on this work by extending it to more than the 40 countries studied here? And more importantly, why has anyone not updated the data on the 40 countries itself from 2006 onwards? The answer to the first question is provided partly by the authors in their paper itself, where they mention that they had to remove 7 additional countries from their list because of a large number of missing indicators. Hence, perhaps data for all the remaining countries will be even more difficult to find. As to the second question, the only answer that makes sense is perhaps the fact that fetching and compiling data for such a study is perhaps too time intensive and cannot be undertaken unless it is a sponsored effort. Incidentally, the authors do mention that their effort for this paper was sponsored.

As mentioned earlier, there is no doubt that a comparative Intellectual Capital ranking of nations can be highly useful to a variety of target audiences. The question that arises therefore is how we can obtain such a ranking without going through the rigor inherent in the method presented by the authors. Can we for instance, use a proxy indicator? In other words, can we identify a commonly available macro data point for nations on which the nations would have more or less the same rank as on their Intellectual Capital? Even if this indicator was not 100% accurate, it could be useful in providing us a quick and dirty ranking of the Intellectual Capital of Nations which would be enough for the purpose of most target audiences.

As I reflected on what such an indicator could be, I wondered whether it could be GDP/capita. But higher GDP/capita is a consequence of higher Intellectual Capital, rather than a cause. Could it then be flow of inward Foreign Direct Investment? But again, inward FDI would be a consequence of higher Intellectual Capital than being a cause. And then it struck me like a bolt. It had to be Electricity consumption/capita. After all, electricity is the root cause of all modern advancements and indeed is the cause for the birth of the knowledge era. Without electricity, our civilization would still be spending a bulk of its time on menial chores such as gathering wood and lighting fires for warmth and for cooking. Electricity has freed us up from these chores to such an extent that we can hardly imagine modern life anymore without it. About the only time we realize the importance of electricity in our lives is during a power outage when we have to start hunting for match boxes and candles to cut through the darkness and suffer through sweltering temperatures since we have been accustomed for years to the comfort of air conditioned residences and offices, all due to the miracle of electricity. In short, electricity has made human kind highly productive over the course of the past century. It has taken care of our routine mundane needs, freeing us for performing higher order activities. And that we have. I imagine that mankind has made more inventions in the past one century than in all of its existence prior to that. Isn’t that a phenomenal achievement? And isn’t it attributable mostly to the invention of electricity? If so, it stands to reason that the more electricity a nation consumes per capita, the more its population will be freed up for performing higher order activities and generate more Intellectual Capital in the process.

I had the hypothesis. The next step was for me to test it. On the one hand, I had the Intellectual Capital of Nations as of 2005 as described earlier. I had to correlate this with the electricity/capita of these countries as of 2005 and check whether I could establish a high degree of correlation between the two. If so, it would prove my hypothesis. I obtained the electricity/capita of these 40 nations from and used the Excel RANK function to rank the consumption of these countries from 1 to 40. I placed these ranks alongside the IC and IC+FC ranks as shown below.
NoCountryIC RankIC+FC rankElectricity consumed/capita (KWh) Electricity consumption rank
5United States55128746
18New Zealand18189404.968
19United Kingdom19195789.9122
21South Korea21217299.0216
28Czech Republic28275835.420
31South Africa31314493.6727

Next, I used the Excel CORREL function to find the Pearson correlation coefficient between the IC and IC+FC ranks with the Electricity consumption/capita ranks. I found that the IC v/s Electricity consumption ranks had a Pearson coefficient of 87.15% whereas the IC+FC v/s Electricity consumption ranks had a Pearson coefficient of 88.37%. Since by definition, any coefficient value above 80% signifies a strong correlation between the two sets, my hypothesis was proved.

Now that I have established that the Electricity consumption/capita can be used as a proxy indicator for ranking the Intellectual Capital of nations, it is straightforward exercise to check where the remaining nations rank on their Intellectual Capital. We just have to look at their Electricity consumption/capita. Moreover in the years ahead, we will perhaps be able to forecast how the Intellectual Capital ranking of nations will change by studying which nations are investing more into their energy infrastructure compared to their peers.

Wednesday, May 2, 2012

Intellectual Capital analysis of change in Indian IT Leadership

The top four Indian IT companies – TCS, Infosys, Wipro and HCL Technologies - have declared their results for the quarter ending March 2012. While TCS and HCL have surpassed analyst expectations, Wipro and especially Infosys have disappointed. The markets have been severely harsh on Infosys in particular, dropping it by about 13% in a single day on the 13th April when it declared its quarterly results. For a company which has been the face of Indian IT around the world for decades, this was quite the drubbing. It is the fifth straight quarter when Infosys has missed its own forecasts, a very unusual territory for this IT giant. Not without reason therefore, Infosys has lost its claim as the industry bellwether and leader of the Indian IT industry, a position that is now claimed unequivocally by TCS. In fact many analysts have downgraded Infosys further. JP Morgan has placed Infosys fourth in the pecking order behind TCS, Wipro and HCL Technologies. CLSA downgraded the scrip to ‘Underperform’ from ‘Outperform’ and Deutsche Bank revised it to ‘Hold’ from its earlier ‘Buy’ rating. Technology analysts have gone further. For instance, Mint published a full page article on Infosys recently in its newspaper asking whether Infosys’s dream run has ended. For a company that employs more than 150,000 people globally, this is a serious question that begs a deeper analysis. Let’s do that using Intellectual Capital as the basis.

Let’s look at TCS first. The Intellectual Capital analysis of TCS for the past four years can be seen online here. The Knowledge Basis portion of the analysis is reproduced in the chart below.

This chart depicts the Knowledge Basis of TCS for the past four years, measured every quarter. Knowledge Basis (KB) is just the ratio of the Intellectual Capital(IC) of the company to its Intrinsic worth (IW). In other words KB = IC/(IC+NW), where IW = (IC + NW) and NW represents the Net worth of the company. As can be seen from the chart, the Knowledge Basis of TCS for the past four years has been more or less steady around the 83% mark. This is another way of saying that 83% of all assets inside TCS are knowledge assets and this number has been more or less very steady over the course of the past four years.

Now let’s turn to Infosys – its Intellectual Capital analysis can be seen online here and its Knowledge basis chart is reproduced below.

We find in this chart that the Knowledge Basis of Infosys was also around the 83% level from Jun 2008 until Dec 2009. That is when it started sliding southwards, dropping to around 74% in Dec 2011 before recovering slightly to 76% in Mar 2012. Even counting the 2% rise in the latest quarter, Infosys is still down 7% from its own benchmark of 83%. Described in other words, this means that only 76% of all assets inside Infosys are Knowledge assets compared to 83% for TCS. Considering that Knowledge assets are significantly more productive than physical or financial assets, is it a surprise to anybody that Infosys has not been delivering stellar results lately? The decline started two years ago in 2010 and has continued steadily since then, although the latest quarter results have shown an uptrend.

This brings us back to the question – has Infosys’s dream run ended? For now, it certainly has. Considering the myriad organizational displacements inside the company recently, this was perhaps inevitable. But Infosys is far from being down and out. A Knowledge Basis of 76% is very healthy even if it is low compared to TCS. It implies that an overwhelming majority of all assets inside Infosys are still knowledge assets, explaining why the company generates more than Rs 1000 cr every quarter by way of Economic value. The good news now is that the market has given away its premium for Infosys stock and the stock is now trading around its fair value ever since its latest quarter results came out. In contrast, the market has taken a strong liking for TCS and has assigned it a premium of more than 30% of its fair value. Will TCS be able to live up to its favored status? Time will tell for sure. But one thing is clear in my mind, while TCS is certainly the better run business, if you had to choose between these two great companies for your investment portfolio, Infosys is the better stock to buy at the moment!

Thursday, October 20, 2011

Lifestyle enhancers

Apple, 3M, GE, Sony, Toyota, Procter & Gamble, Samsung, etc. are among some of the well known companies that have been consistently voted into the list of the most innovative companies in the world for many years at a stretch. This begs the question – how do they do it? How do these companies make the list of most innovative companies in the world with such alarming regularity? What is it that they are doing right about innovation that their competition isn’t? After all, isn’t innovation fraught with risk? Before you try and correlate the innovation success of these companies with the quantum of their R&D spend, let me dispel that notion right away. Booz and Company recently published their Global Innovation 1000 study during which they found that seven of the top 10 innovative companies were not even among the top 10 spenders on R&D. On the contrary, the R&D spend of the most innovative companies as a percentage of their annual sales was typically less than 5%, compared to more than 10% for some of the heavy hitters. This study therefore confirms the fact that you cannot throw money at innovation and expect it to happen. The reverse, however, is very true. The same study showed that the most innovative companies were able to generate a higher EBITDA as a percentage of revenue compared to the ones who were not innovating so much! So whereas money cannot generate more innovation, innovation definitely generates more money. And that is the reason why we need to understand what the highly innovative companies do right.

I had to give it considerable thought, but in the end I came to the conclusion that the most successful innovative companies produce an innovation or a series of innovations that enhances our lifestyles by a couple of notches every time. The widespread acceptance and adoption of these innovations move our entire civilization forward a notch, in much the same way that homo-sapiens has progressed through the ages - from hunters to growing their own food as farmers, then to leverage machines to do his work faster during the industrial age and finally to use knowledge to become more efficient at his work during the information age. Let me cite just two examples to make my point.

Sony invented the Walkman portable music player in the late seventies, allowing humankind for the first time to carry their music along with them. Listening to music is a basic human need, since music is the food that feeds our souls. Understanding this need, Sony’s engineers gave vent to their creative genius and designed a compact portable music player. It was a mega hit with the masses for the next two decades and many imitations followed. But if you want to buy one today, you will be hard pressed to find one. Why? Because, although the Walkman made your music portable, its magnetic audio tape based storage technology had limitations of capacity and sequential seek Another enterprising company, by the name of Apple, recognized these shortcomings at the start of the century and their design engineers put their creative minds to work to innovate a portable music player called the Ipod. They introduced digital storage technology along with massive capacity into a device that is probably a tenth of the size of the Walkman. Ipods are such a rage with the masses today that the Walkman has become obsolete as quickly as it became famous. Such is the popularity of the Ipod today that any true music lover will not be caught without one today or at least an imitation of it. However, the larger point I want to make is that in creating the Walkman and the Ipod, both Sony and Apple enabled civilization at large to progress a notch by liberating it from the clutches of unportable music players.

Let us take another example. We all know the tremendous benefits humankind has derived from the invention of the modern motor car. Transportation has become much faster due to the motor car enabling us to be more productive in our day compared to the worker of the nineteenth century. However, after a century of guzzling gas the world over, car makers realized that the motor car could not be sustained to run on gasoline forever, since the world’s oil reserves were depleting at an alarming rate. This is when car makers got into a frantic race to develop cars that could run on alternative energy sources such as electricity, solar energy, etc. Many even developed commercial variants of their alternate energy cars. However, the company that achieved the most amount of commercial success in this regard was Toyota with its Prius car. Unlike other manufacturers, Toyota did not seek to develop a purely alternate energy car. Instead they developed a hybrid, a car that can run on gas as well as electricity. Their engineers installed an electric motor alongside the petrol engine and innovated to develop a Hybrid system that makes the electric motor act as a high-output generator to produce regenerative braking during deceleration. Simply put, it means that the car is storing the braking energy as electric energy to be used later for cruising without petrol. Ingenious! In one stroke, Toyota solved multiple problems – their hybrid approach doubled the mileage of the Prius compared to other petrol only cars, their regenerative hybrid system overcame the problem of the limited battery capacity of pure electric cars and at the same time their hybrid approach ensured that the performance of the car was not compromised in any way. The Prius was first introduced in the late nineties. Since then many other manufacturers have introduced commercial hybrid cars of their own and I believe that this trend is only going to increase in the years ahead. The larger point in this example is that with the hybrid Prius, Toyota enabled its Customers to address the issues of dwindling oil reserves and pollution without compromising in any way on everything they had come to expect from a transportation vehicle such as a car. Once again, Toyota managed to push the envelope and move civilization forward by a notch with its hybrid car innovation.

The ability to innovate and introduce commercially successful products and services is to me yet another pattern of Intellectual Capital – I have coined the name ‘Lifestyle Enhancers’ for this pattern. Make no doubt, innovative ability is a rare ability and one fraught with risk. Yet it is a type of Intellectual Capital that many large companies mentioned at the start of this article have harnessed and molded into commercial success. All of these companies are household names today - some of them have come into existence only in the last decade but have made their mark very quickly with their ability to innovate at every step of their existence. Such is the power of innovation, which is only a subset of Intellectual Capital. What would it be like if a company could harness all aspects of its Intellectual Capital? Your guess is probably better than mine.