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Knowledge ManagementKnowledge
ManagementDr. Randy M. KaplanDr. Randy M. Kaplan
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Assessing the Value of KnowledgeAssessing the Value of Knowledge
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Assessing the Value of Knowledge
Assessing the Value of Knowledge
If we believe that knowledge represents an asset then we must have a way to assess that asset
This is especially true in the profit-making organizational sense where assets are considered a part of the organization’s value
If we believe that knowledge represents an asset then we must have a way to assess that asset
This is especially true in the profit-making organizational sense where assets are considered a part of the organization’s value
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Assessing the Value of Knowledge
Assessing the Value of Knowledge
A long standing problem with the valuation of knowledge is exactly how value is applied to a particular constellation of knowledge
Since knowledge is not tangible it becomes a difficult entity to value and yet …
It is surely the case that without intellectual capital an organization would not be profitable
A long standing problem with the valuation of knowledge is exactly how value is applied to a particular constellation of knowledge
Since knowledge is not tangible it becomes a difficult entity to value and yet …
It is surely the case that without intellectual capital an organization would not be profitable
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Assessing the Value of Knowledge
Assessing the Value of Knowledge
Financial Models
Provide a basis for a theory for an organization
Financial statements are the expression of the model
Only deals with the tangible assets of an organization
Financial Models
Provide a basis for a theory for an organization
Financial statements are the expression of the model
Only deals with the tangible assets of an organization
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Assessing the Value of Knowledge
Assessing the Value of Knowledge
A key aspect of being able to assess the value of knowledge in an organization is to be able to identify intellectual capital in an organization
One popular approach to improving the performance of an organization is called business process re-engineering (BPR)
BPR was famous for saying “its not the people stupid.”
A key aspect of being able to assess the value of knowledge in an organization is to be able to identify intellectual capital in an organization
One popular approach to improving the performance of an organization is called business process re-engineering (BPR)
BPR was famous for saying “its not the people stupid.”
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Assessing the Value of Knowledge
Assessing the Value of Knowledge
The originator of BPR believed that if you could discover the underlying processes of an organization and,
if you could make these processes more efficient (a process like debugging),
then it would result in an organzation with significantly better performance
The originator of BPR believed that if you could discover the underlying processes of an organization and,
if you could make these processes more efficient (a process like debugging),
then it would result in an organzation with significantly better performance
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Assessing the Value of Knowledge
Assessing the Value of Knowledge
An important aspect of BPR was that once you had the process, the people in particular roles could be interchanged
In other words, once you had the process the particular person offered no additional value to the process
An important aspect of BPR was that once you had the process, the people in particular roles could be interchanged
In other words, once you had the process the particular person offered no additional value to the process
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Assessing the Value of Knowledge
Assessing the Value of Knowledge
At the end of many BPR efforts it was found that organizational performance did not improve but actually became worse
10 years after BPR originated the originator discovered that people were in fact important to the process
At the end of many BPR efforts it was found that organizational performance did not improve but actually became worse
10 years after BPR originated the originator discovered that people were in fact important to the process
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Assessing the Value of Knowledge
Assessing the Value of Knowledge
With the general decline of the re-engineered organization their needed to be a new theory of organization that included intangibles
This new theory of organization, one based on Kaplan’s and Norton’s Balanced Score Card gave KM practitioners the opening they needed to bring knowledge into the organizational picture
With the general decline of the re-engineered organization their needed to be a new theory of organization that included intangibles
This new theory of organization, one based on Kaplan’s and Norton’s Balanced Score Card gave KM practitioners the opening they needed to bring knowledge into the organizational picture
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Balanced Score CardBalanced Score Card
www.balancedscorecard.orgwww.balancedscorecard.org
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Balanced Score CardBalanced Score Card
A response to the weaknesses and vagueness of previous management approaches
A clear prescription of what companies should measure in order to balance the financial perspective
A response to the weaknesses and vagueness of previous management approaches
A clear prescription of what companies should measure in order to balance the financial perspective
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Balanced Score CardBalanced Score Card
From Kaplan and Norton,
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."
From Kaplan and Norton,
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."
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Balanced Score CardBalanced Score Card
Why is it about the Balanced Score Card that supports the idea of the valuation of knowledge?
If you consider the last part of the last sentence,
investment in customers, suppliers, employees, processes, technology, and innovation.
To invest in customers, suppliers and employers means to invest in knowing
Why is it about the Balanced Score Card that supports the idea of the valuation of knowledge?
If you consider the last part of the last sentence,
investment in customers, suppliers, employees, processes, technology, and innovation.
To invest in customers, suppliers and employers means to invest in knowing
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Knowledge-Based AssetsKnowledge-Based Assets
A theory of organization that takes knowledge into account
can focus on the ease with which knowledge can be converted into products and services
provide value to the customers
now, in the future
A theory of organization that takes knowledge into account
can focus on the ease with which knowledge can be converted into products and services
provide value to the customers
now, in the future
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Knowledge-Based AssetsKnowledge-Based Assets
Managing stakeholder relationships
to improve the flow of knowledge
to create knowledge-based assets
to produce new products and services
is a competence organizations must master
Managing stakeholder relationships
to improve the flow of knowledge
to create knowledge-based assets
to produce new products and services
is a competence organizations must master
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DefinitionsDefinitions
A. Asset
1. A useful or valuable quality, person, or thing; an advantage or a resource. 2. A valuable item that is owned. … 4. assets. a. Accounting. The entries on a balance sheet showing all properties tangible and intangible and claims against others that may be applied directly or indirectly to cover liabilities of a person or business
A. Asset
1. A useful or valuable quality, person, or thing; an advantage or a resource. 2. A valuable item that is owned. … 4. assets. a. Accounting. The entries on a balance sheet showing all properties tangible and intangible and claims against others that may be applied directly or indirectly to cover liabilities of a person or business
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DefinitionsDefinitions
Asset (cont.)
such as cash, stock, or goodwill
Asset (cont.)
such as cash, stock, or goodwill
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DefinitionsDefinitions
Intellectual or Knowledge-Based Asset
Anything valued without physical dimensions
Embedded in people
Derived from the processes, systems, and culture associated with an organization
Intellectual or Knowledge-Based Asset
Anything valued without physical dimensions
Embedded in people
Derived from the processes, systems, and culture associated with an organization
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DefinitionsDefinitions
Intellectual or Knowledge-Based Asset
Brands, individual knowledge, intellectual property, licenses, forms of organzational knowledge
databases
process know-how
relationships
Intellectual or Knowledge-Based Asset
Brands, individual knowledge, intellectual property, licenses, forms of organzational knowledge
databases
process know-how
relationships
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DefinitionsDefinitions
(Third Critical Concept) Capital
Wealth
in the form of money or property
used or accumulated in a business by a person, partnership, or corporation
Material wealth used or available for use in the production of more wealth
(Third Critical Concept) Capital
Wealth
in the form of money or property
used or accumulated in a business by a person, partnership, or corporation
Material wealth used or available for use in the production of more wealth
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DefinitionsDefinitions
(Third Critical Concept) Capital
Human resources considered in terms of their contributions to an economy
Accounting, the remaining assets of a business after all liabilities have been deducted; net worth
(Third Critical Concept) Capital
Human resources considered in terms of their contributions to an economy
Accounting, the remaining assets of a business after all liabilities have been deducted; net worth
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MetricsMetrics
In KM
Metrics are in ther experimental stage
here today, gone (or revised) tomorrow
Characteristic can be concerting for measurement traditionalists
Not enough is known to share emerging practices
In KM
Metrics are in ther experimental stage
here today, gone (or revised) tomorrow
Characteristic can be concerting for measurement traditionalists
Not enough is known to share emerging practices
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MetricsMetrics
Distinction between measurement and valuation not well understood by those who approach knowledge management from the human resources or information technology perspective
Distinction between measurement and valuation not well understood by those who approach knowledge management from the human resources or information technology perspective
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MetricsMetrics
Same is not true for -
financial analysts
intellectual property attorneys
economists
accountants
Same is not true for -
financial analysts
intellectual property attorneys
economists
accountants
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MetricsMetrics
For this group -
Measurement monitors activity
Valuation places a monetary value on expected cash flow from an asset or a group of assets or which is expected to exist with some degree of probability
For this group -
Measurement monitors activity
Valuation places a monetary value on expected cash flow from an asset or a group of assets or which is expected to exist with some degree of probability
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MetricsMetrics
Measurement
Seeks to describe a particular organizational state by quantifying its inputs and outputs
Measurement has dominated the knowledge management assessment discussion to date
Measurement
Seeks to describe a particular organizational state by quantifying its inputs and outputs
Measurement has dominated the knowledge management assessment discussion to date
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MetricsMetrics
Valuation has risen
Because executives need to understand how KM translated into value for the organization
(otherwise why should the executive invest in KM?)
Valuation has risen
Because executives need to understand how KM translated into value for the organization
(otherwise why should the executive invest in KM?)
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MetricsMetrics
Measurement
Good at understanding the relationship between activity and operational outcomes
For example, effectiveness and efficiency
It is not as good at relating effectiveness to and efficiency to financial outcomes
Measurement
Good at understanding the relationship between activity and operational outcomes
For example, effectiveness and efficiency
It is not as good at relating effectiveness to and efficiency to financial outcomes
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MetricsMetrics
For a true science of KM measurement to develop the fields of valuation andf measurement must be combined to create a brand new discipline
For a true science of KM measurement to develop the fields of valuation andf measurement must be combined to create a brand new discipline
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KM Metrics TodayKM Metrics Today
Metrics that are in use today -
Attempt to complete the picture of how well an organization builds, replenishes, or depletes its total asset base
Some of these metrics are familiar
% of sales from new products
number of college graduates
Metrics that are in use today -
Attempt to complete the picture of how well an organization builds, replenishes, or depletes its total asset base
Some of these metrics are familiar
% of sales from new products
number of college graduates
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Familiar MetricsFamiliar Metrics
time to market
employee turnover
time to market
employee turnover
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Unfamiliar MetricsUnfamiliar Metrics
Others try to establish a new way to understand how well an organization creates and maintains the right knowledge-based assets
return on people, rookie ratio, loyal customer percentage, number of ideas generated
Others try to establish a new way to understand how well an organization creates and maintains the right knowledge-based assets
return on people, rookie ratio, loyal customer percentage, number of ideas generated
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Unfamiliar MetricsUnfamiliar Metrics
Metrics collected from data are so-called hard metrics
Qualitative or so-called soft metrics have also begun to creep in as measurement criteria
Soft metrics have precedent in customer and employee satisfaction surveys
Metrics collected from data are so-called hard metrics
Qualitative or so-called soft metrics have also begun to creep in as measurement criteria
Soft metrics have precedent in customer and employee satisfaction surveys
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Unfamiliar MetricsUnfamiliar Metrics
KM Movement has extended the use of soft measures into such areas as -
organizational capability, including,
innovation potential
knowledge absorption capacity
KM Movement has extended the use of soft measures into such areas as -
organizational capability, including,
innovation potential
knowledge absorption capacity
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Unfamiliar MetricsUnfamiliar Metrics
KM Movement also pushing limits of hard metrics
For example -
Determine the possibility of evaluating areas such as return on knowledge-based assets
KM Movement also pushing limits of hard metrics
For example -
Determine the possibility of evaluating areas such as return on knowledge-based assets
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Avery DennisonAvery Dennison
US-based adhesives and office supply products manufacturer
Metrics
Cognitive capability
Human capital motivation
Being used to determine the possibility of evaluating areas such as the the return on knowledge-based assets
wledge
US-based adhesives and office supply products manufacturer
Metrics
Cognitive capability
Human capital motivation
Being used to determine the possibility of evaluating areas such as the the return on knowledge-based assets
wledge 37
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Avery DennisonAvery Dennison
Metrics are communicated by combining soft metrics with hard metrics
These are presented visually in the form of spider maps
Mapping each project lets the organization create a comprehensive view of its entire development effort
Metrics are communicated by combining soft metrics with hard metrics
These are presented visually in the form of spider maps
Mapping each project lets the organization create a comprehensive view of its entire development effort
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Avery DennisonAvery Dennison
Spider MapSpider Map
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Avery DennisonAvery Dennison
In viewing projects in this way, overall strategic fit can be maximized
Strengths and weaknesses in its stock of knowledge-based assets can be uncovered
In viewing projects in this way, overall strategic fit can be maximized
Strengths and weaknesses in its stock of knowledge-based assets can be uncovered
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Economist’s ViewEconomist’s View
Knowledge-Based Assets
If you go to a toy store to buy a board game for your child, you will most likely find your eyes glazing over as you scan a toy shelf loaded with similar board games within a fairly narrow price range
Knowledge-Based Assets
If you go to a toy store to buy a board game for your child, you will most likely find your eyes glazing over as you scan a toy shelf loaded with similar board games within a fairly narrow price range
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Economist’s ViewEconomist’s View
Comparing Games
Trying to pick a game involves running through a series of questions such as:
How long will my child be interested in this game?
How many other members of this family can play this game too?
Comparing Games
Trying to pick a game involves running through a series of questions such as:
How long will my child be interested in this game?
How many other members of this family can play this game too?
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Economist’s ViewEconomist’s View
Comparing Games
Is this game more interesting than the game next to it?
At some pointyou make a decision about this game or the next game
Comparing Games
Is this game more interesting than the game next to it?
At some pointyou make a decision about this game or the next game
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Economist’s ViewEconomist’s View
Economist’s ask similar questions
Their perspective is wider
How did the board game get to the shelf in this store?
Why did the company choose to produce this board game?
Economist’s ask similar questions
Their perspective is wider
How did the board game get to the shelf in this store?
Why did the company choose to produce this board game?
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Economist’s ViewEconomist’s View
Economist’s ask similar questions
Why did other companies choose to compete by offering other games on the shelf?
Why does it carry this price?
The answers to these questions help economists understand how people make choices
Economist’s ask similar questions
Why did other companies choose to compete by offering other games on the shelf?
Why does it carry this price?
The answers to these questions help economists understand how people make choices
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Economist’s ViewEconomist’s View
One of the largest considerations when asking these kinds of questions about knowledge-based assets as opposed to tangible assets is the creativity that must be used to find benchmarks
A computer chip is a kind of knowledge-based asset
If the computer chip reduces the cost of computing ...
One of the largest considerations when asking these kinds of questions about knowledge-based assets as opposed to tangible assets is the creativity that must be used to find benchmarks
A computer chip is a kind of knowledge-based asset
If the computer chip reduces the cost of computing ...
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Economist’s ViewEconomist’s View
If the computer chip reduces the cost of computing …
… benchmarks are hard to come by
The market for such an invention is harder to define
Comparables are harder to find
If the computer chip reduces the cost of computing …
… benchmarks are hard to come by
The market for such an invention is harder to define
Comparables are harder to find
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Accountant’s ViewAccountant’s View
Valuation does not present a problem when,
an intellectual asset has been ‘bounded’ by a copyright, trademark, patent, or boundary
Valuation does not present a problem when,
an intellectual asset has been ‘bounded’ by a copyright, trademark, patent, or boundary
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Accountant’s ViewAccountant’s View
Valuation is more complicated when a boundary has not been as well delineated as in cases like,
workforce
company culture
business process know how
Valuation is more complicated when a boundary has not been as well delineated as in cases like,
workforce
company culture
business process know how
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Accountant’s ViewAccountant’s View
This is not because we don’t have the valuation techniques
It is because the quality of data for ill-defined assets makes valuation much more suspect
Improving the quality of the input data is a very complex task
This is not because we don’t have the valuation techniques
It is because the quality of data for ill-defined assets makes valuation much more suspect
Improving the quality of the input data is a very complex task
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Accountant’s ViewAccountant’s View
Robust markets for certain types of intellectual assets do not exist
Lack of a solid foundation for setting a price
Robust markets for certain types of intellectual assets do not exist
Lack of a solid foundation for setting a price
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Accountant’s ViewAccountant’s View
For intellectual assets, performance metrics that monitor how management actions affect level, direction, and momentum are currently the best way to understand how intellectual assets impact business performance
Making a definitive link to business performance - the value link is challenging
For intellectual assets, performance metrics that monitor how management actions affect level, direction, and momentum are currently the best way to understand how intellectual assets impact business performance
Making a definitive link to business performance - the value link is challenging
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Accountant’s ViewAccountant’s View
A problem with data collection
Not enough organizations have been collecting sufficient information for
long enough
on a consistent basis
to perform vigorous analysis to determine which measures link to value creation
A problem with data collection
Not enough organizations have been collecting sufficient information for
long enough
on a consistent basis
to perform vigorous analysis to determine which measures link to value creation
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Accountant’s ViewAccountant’s View
Three basic approaches are used to value assets
cost, either historic or replacement
market price, the price at which an asset is traded
economic benefit, reflecting the revenues, costs and risks associated with commercializing an asset
Three basic approaches are used to value assets
cost, either historic or replacement
market price, the price at which an asset is traded
economic benefit, reflecting the revenues, costs and risks associated with commercializing an asset
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BrandsBrands
Increasingly important part of a company’s asset base
Vital component of the company’s intellectual capital
A brand is a relationship between the company and its stakeholders
Increasingly important part of a company’s asset base
Vital component of the company’s intellectual capital
A brand is a relationship between the company and its stakeholders
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BrandsBrands
The relationship is built on a foundation of -
perceived and actual
value of the company’s goods and services
cemented by effective communications
The relationship is built on a foundation of -
perceived and actual
value of the company’s goods and services
cemented by effective communications
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BrandsBrands
Financial valuation of brands is important
draws linkages between brand performance and its impact on long-term financial results
Without these results -
Decision makers can’t make decisions about brands (decisions about investment)
Financial valuation of brands is important
draws linkages between brand performance and its impact on long-term financial results
Without these results -
Decision makers can’t make decisions about brands (decisions about investment)
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BrandsBrands
Economic Benefit Approach to the valuation of brands
important advantage
offers brand owner a measurement
ongoing management mechanism
consider the brand on a par with other long term assets
Economic Benefit Approach to the valuation of brands
important advantage
offers brand owner a measurement
ongoing management mechanism
consider the brand on a par with other long term assets
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Capital ValueCapital Value
The Capital Value of any business can be represented by the equation -
Cci + Vci = Cvb, where,
Cci -> value of capital currently invested in the business
Vci -> value creation expected from the invested capital
Cvb -> capital value of business
The Capital Value of any business can be represented by the equation -
Cci + Vci = Cvb, where,
Cci -> value of capital currently invested in the business
Vci -> value creation expected from the invested capital
Cvb -> capital value of business
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BrandsBrands
Brands are part of the expected value creation (Vci)
Economic benefit of a brand
Enhanced economic earnings
More secure economic earnings
Both of the above
Brands are part of the expected value creation (Vci)
Economic benefit of a brand
Enhanced economic earnings
More secure economic earnings
Both of the above
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MeasuresMeasures
Examples of Measures to Evaluate Intellectual CapitalExamples of Measures to Evaluate Intellectual Capital
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ExamplesExamples
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ExamplesExamples