The dominance of intangible assets:

consequences for enterprise

management and corporate reporting
Baruch Lev and Juergen H. Daum

Baruch Lev is Professor of

Accounting and Finance at
New York University, Stern
School of Business, the Director
of the Vincent C. Ross Institute
for Accounting Research and
the Project for Research on
Intangibles. He is a
internationally recognized
expert for accounting and
reporting issues related to
intangible assets, working
closely with such institutions as
the US Securities and Exchange
Commission and the Financial
Accounting Standards Board,
OECD, the EU, and the
Brookings Institution (Web site:
www.baruch-lev.com/).
Juergen H. Daum is Chief
Solution Architect in the
Business Solution Architects
Group SAP AG, Walldorf,
Germany. He was previously
program and product manager
in SAP's core development
group and was responsible for
the repositioning of SAP's
nancial and accounting
applications, mySAP Financials,
and played a key role in
shaping the SAP Strategic
Enterprise Management
solution. Prior to joining SAP he
was the CFO and controller of a
German IT company (Web site:
www.juergendaum.com).

PAGE 6

Abstract Intangible assets have become important factors of value creation in today's
knowledge economy. However, individually they are often commodities and only create value in
combination with other production factors. Therefore, in order to manage for performance and
value, companies and their managers, as well as their investors, need a better understanding
of their role as part of the entire value creation system of an organization. The article outlines
possible features of an improved management and corporate reporting model. In order to
objectively measure the productivity and efciency of the entire enterprise, the article outlines
how total factor productivity can be assessed in organizations as a means to better understand
organizational performance.
Keywords Intangible assets, Financial reporting, Management activities

Introduction
At the beginning of the 1990s a signicant change regarding the asset compositions of
business enterprises became apparent. During the 1980s the book value of corporations has
been constantly shrinking in relation to market value. The residual, which is often regarded as
the capital markets view of the value of a corporation's intangible assets, was rising. As a result,
in only ten years the relation between book value and value of intangibles has been totally
reversed for the average S&P500 company: between 1982 and 1992 the value of intangibles
increased from 38 percent to 62 percent of market value and book value decreased from
62 percent to 38 percent. This drew attention to the rising phenomenon of intangible assets.
Pioneers in the eld created awareness for intangibles as the new source of corporate value
and growth, and to the serious information deciencies related to these assets. Research
(Nakamura, 2003) indicated that in the late 1990s the annual US investment in intangible assets
(e.g. R&D, brand enhancement, employee training) was roughly $1.0 trillion, almost equal to the
total investment of the manufacturing sector in physical assets ($1.2 trillion). Furthermore,
investments in intangibles, particularly those that enable enterprises to innovate, bring in returns
that are signicantly higher than costs of capital and the returns of xed asset investments, even
in traditional industries such as the chemical industry (Lev and Aboody, 2001).
Today, the role of intangibles as value and growth creators is accepted among economists,
investors and managers (Neely et al., 2003). There seems general agreement that traditional
(accounting-based) information systems are not able to provide adequate information about
corporate intangible assets and their economic impact. This has serious implications as it

MEASURING BUSINESS EXCELLENCE

VOL. 8 NO. 1 2004, pp. 6-17, Emerald Group Publishing Limited, ISSN 1368-3047

DOI 10.1108/13683040410524694

causes volatility of stock prices, which results in undue losses to investors and misallocation of
resources in capital markets. As a consequence, intangible-intensive enterprises are confronted with excessive cost of capital, hindering their investment and growth. Corporate
outsiders have even less access to such information and the resulting information imbalance
can lead to excessive trading gains to corporate insiders, destroying investors' condence
(Lev, 2001; Hand and Lev, 2003).
The ``intangibles movement'' has succeeded in the rst phase of its mission: in creating
awareness and an active discourse about the economic role of intangible assets and their consequences. However, the time has come to move to the next level into practical application.
For this, two major issues need to be addressed:
(a) Intangible assets by themselves neither create value nor generate growth: they need to
be combined with other production factors. They need efcient support and enhancement
systems otherwise the value of intangibles dissipates much quicker than that of physical
assets. Corporate reporting and internal management systems must therefore provide a
more holistic view that allows investors and managers to evaluate the performance of the
total value creation system of the company, including its various production factors, assets,
processes and procedures in their combination. The focus needs to be on total factor
productivity.
(b) The value of intangible assets is related to the future. They represent capabilities and
``potential'' for future growth and income. Our current management and corporate reporting
practice are primarily focused on backward looking information. This needs to change
towards forward looking information and we must adopt a more dynamic approach than
traditional performance management concepts that are based on annual budgeting.
Instead, planning has to become an integral part of the monthly or weekly performance
management process. Regular checks of an enterprise's total factor productivity might
become a standard procedure in the performance management process in order to enable
constant optimization of total factor productivity.
Below we describe rst the changes in the economy which triggered the need to measure
and manage the intangible value drivers of organizations. We then discuss the economic
difference between traditional assets and intangible assets before we outline possible features
of an improved management and reporting model, which include a concept for how to measure
total factor productivity in organizations as a means to better understand organizational
performance.

Towards the knowledge economy

The growing intangible assets base of corporations represents a symptom of a larger economic
transformation the transformation from the industrial economy, characterized by a seller's
market and industrial mass production, to today's knowledge economy, where companies
have to operate in open global buyer's markets and where differentiation has become a
key success factor. This requires continuous innovation, customer centricity and high quality
customer services. This need for continuous innovation and customer centricity, which is
reinforced through open global markets, required companies in the last decades to invest
more and more in their innovation and adaptation capabilities as well as in customer attraction
(brands and relationship building). The result is that more and more resources are put into the
preparation of operative activities (for instance in R&D, brand building, building customer
relationships, employee education, exible supply chain networks or information technology
infrastructure), instead of execution (such as producing, selling and delivering products and
services).
The outcome in the form of assets created e.g. human capital, R&D pipeline, or brands
represent not so much the result of invested nancial capital but rather a by-product of wellmanaged operative activities and processes. As a result, the operations model of modern
companies has evolved into a complex model, where activities that create business potential for
the future, such as product development or customer relationship building, become an integral
part of the operations model. The traditional distinction in accounting between acquisition of

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assets (creation of growth potential) and its exploitation (operations) is becoming blurred. In
the same way as the company environment is constantly changing, so are the intentions and
goals of the stakeholders. Therefore, the value-creating constellation that is the basis for the
operations model cannot remain xed. Instead, it has to be continuously adapted. Therefore,
we need a more future oriented and dynamic approach to enterprise management. That is why
traditional nancial and management accounting is failing to adequately support management
in today's environment: it is too narrow, too inexible, and too much focused on the past and
present (see Figure 1).
Awareness for intangibles is an important rst step, but focusing on and optimizing single
intangible assets and the processes that creates and utilizes them is not enough. Instead,
companies must constantly optimize their entire bundle of production factors in order to create
sustainable value for customers, shareholders and other stakeholders. This requires a holistic
view of the entire value creation system of a company that allows it to create economic value
through the intelligent combination of its various value creating processes, its competencies,
resources and assets. It requires focusing on an enterprise's total factor productivity.

Economics of intangibles
Current nancial statements in their present form only give a limited account of the real
economic conditions of a company. They provide no information about the growth and
adaptation potential of a company, nor do they disclose how efcient the company is in utilizing
its bundle of resources, assets and capabilities to generate future revenue and income. From an

Figure 1 Towards the operation model of the knowledge economy (Daum, 2003a)

New Operations Model

Traditional Industrial
Operations Model

Product
Develop.3
Procurement

Manufacturing

Sales

Delivery

Ph. Assets / Financial Capital

"Seller's Market"

Supplier

Fullfillment1

Ph.Assets

HR

CRM2
Fin. Cap.

Customer

Int. Assets

"Buyer's Market"

Time horizon: month, quarter

Time horizon: quarter1, 1-2 years2, 3-5 years3

More direct relationship between in- and output

More indirect relationship between inand output

Resources/assets can be acquired and

deployed short-term

Reporting and Controlling tools:
P&L, fin. statement, capital flow and accounting

More resources must be developed internally

Reporting and Controlling tools: ?

Reporting instrument
giving information
about "competencies"
and resources:

Reporting instrument
that gives information
about success
in implementation:

Dynamic complexity in business system:

a growing tension between value creation
and value extraction

B/S and
Cash Flow Reports

P&L and
Cost Accounting

The distinction between "assets" and

"operations" blurred

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economic perspective this efciency might be the key differentiator of companies. In order to be
able to optimize and manage this efciency, mangers have to be aware of the economics of
intangibles.
Intangibles are inert by themselves, they neither create value nor generate growth (Lev,
2002a). Their value is context specic. For example investments in e.g. training only generate
nancial value (lower costs or higher revenues) when it is combined with other factors, such as
improved business processes and the availability of the right information systems. Without
efcient support and enhancement systems, a company is not able to translate the potential its
intangible assets represent into value for customers and shareholders and even worse: without
such tools the value of intangibles dissipates much quicker than that of physical assets.
For example the capabilities of highly qualied scientists at Pzer, Roche or Schering will not
result in marketable products without appropriate supporting processes for drug research and
development. In the same way that a large patent portfolio at Dow Chemicals and IBM is by
itself of little value without an intellectual property management system that helps to monitor
and oversee all available patents, that supports periodic analysis of the entire portfolio in order
to determine new patent use and thus value creation opportunities, and that keeps track of the
corresponding ``value extraction'' projects and programs.
Intangibles are not only inert, many are also commodities since most business enterprises
have equal access to them. Pharmaceutical companies have similar access to the best
pharmaceutical researchers. Most companies can license patents or acquire R&D capabilities
via corporate acquisitions. Since competitors have equal access to such assets they do not
create a competitive advantage by itself and as a result, at best, return only the cost of capital
(zero value added).
The inertness and commoditization of most intangibles have important implications for today's
corporations, their managers and investors. Because intangibles require appropriate support
systems and specic ``organizational recipes'' to create value for customers and to make a
difference in the market, the organizational infrastructure of a company becomes a critical
``production factor''. With organizational infrastructure we mean the business processes
and systems that transform tangible and intangible assets into bundles of assets that help to
create a competitive advantage and to generate sustaining cash ows. Such organizational
infrastructure is non-commoditized (i.e. unique), as it supports the given mission and culture of
the enterprise in its specic environment. Thus, the organizational infrastructure represents the
major intangible of the enterprise (Lev, 2002a).

A company's organizational infrastructure is a bundle of systems, processes and business

practices that helps the company to achieve its objectives. What we therefore need is a new
focus on organizational infrastructure the engine and transmission belt for creating value from
all type of assets. This infrastructure is not static, instead, it needs to be continuously adapted to
new market and business conditions to sustain the company's effectiveness for value creation.
This adaptation capability itself is part of the organizational infrastructure of an enterprise.
How fast and appropriate an organization is able to adapt to new business conditions is a key
competence of the enterprise.
Like un-coding the human genetic code, understanding the ``enterprise code'' the
organizational infrastructure with its processes, recipes and the capability to change will
enable us to answer critical questions. In the following sections we will try to lay the foundation
for such an approach with the focus on the management system and corporate reporting.
This may not be complete yet; however, our main intention is to show the direction for designing
new management and reporting systems.

A new management system and corporate reporting framework

Companies appear, to both outsiders and the management, as a ``black box''. Without a
suitable model to understand the internal and usually complex black box systems, it is not
possible for the observer to gain valuable and decision oriented insights into their performance.

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To the investor, for example, the company represents a unit whose purpose is to generate
maximum sustainable cash ows and he can choose in an open capital market which company
to invest in. His difculty lies in correctly assessing what strengths a particular company has in
comparison to other companies to transform today's investments into the highest possible
future return (e.g. dividend payments and increases in the market value). The investor needs to
understand not only the current performance, but also has to come to a conclusion how this
performance will develop over a particular time span, namely the time he intends to hold the
stock (Daum, 2003a).
The traditional information system designed to help here are the published nancial statements
in form of income statement and balance sheet. When companies were operating on the basis
of cost and nancial capital efciency in relatively stable markets dominated by sellers, this
reporting and management system was adequate. The income statement contained sufcient
information regarding cost efciency by detailing production costs and overhead the essential
drivers of operational productivity in manufacturing companies. The balance sheet contained
additional information about the effective use of tangible assets (such as machinery and
equipment) and nancial capital. All this enabled the investor to make a relatively prudent
assessment of the future performance of the company. This contrasts with the situation today
where the balance sheet only contains a small fraction of the actual company value, and where
the income statement does not reect any more the value creation system of today's
businesses.
The goal of a new management and reporting approach is to look inside the enterprise and
to portray the mechanism that mobilizes the relationships between invested and available
resources, external business partners and the structural capital of the company, such as
business processes, organizational procedures, information technology infrastructure, work
processes etc., that create value for customers, shareholders and other stakeholders. Most
nancial reporting and performance measurement concepts fall short because they just provide
a nancial picture that shows how effective a company was in the past to utilize its resources.
They provide no information about the development of the competence base of the company
for generating future revenues (or reduced costs) in all of the dimensions relevant.
We must therefore expand accounting and control systems to enable companies to optimize,
manage and report on their real value creating activities and processes. Important information
for managers and investors concerns the enterprise's value chain (Lev, 2001), the fundamental
economic process of innovation that starts with the discovery of new products, services or
processes, proceeds through the development and implementation phase to commercialization
of the new products or services. This innovation process is where much of the economic
value is created in today's knowledge based businesses. To measure the performance of
this process would represent a step forward both for internal decision making and external
reporting. Figure 2 depicts such a system of measures.
But because the true value of intangible assets becomes apparent only within a specic
context, the entire enterprise value creation model, in which corporate resources and tangible
as well as intangible assets are created and in particular utilized, must be taken into account.
Thus, it is important to develop a strategy for bundling all sources of value creation potential into
a single ``recipe for adding value''.
The enterprise performance management system
An important prerequisite for the ability of corporate management to manage for sustainable
value creation is the availability of objective information on the status of all relevant value
creating activities. Figure 3 (left side) shows a generic model for the systematic development
of a holistic enterprise performance measurement system that describes a holistic view for
enterprise control the Tableau de Bord (see e.g. Epstein and Manzoni, 1997; Gray and
Pesqueux, 1993; Daum, 2002). This business scorecard enables the systematic monitoring of
performance as well as of emerging opportunities and risks in the company's overall value
creation system. It is a cornerstone of the new enterprise management system.

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Figure 2 Lev's value chain blueprint (Lev, 2001)

Discovery and learning

Research and development

Organizational Capital,
processes

Commercialization
7. Customers

4. Intellectual Property

1. Internal renewal

Work force training and

development

Implementation

Patents, trademarks, and

copyrights

Marketing alliances

Licensing agreements

Customer churn and value

Coded know-how

Online Sales

Brand values

8. Performance
5. Technological feasibility
2. Acquired capabilities
Technology purchase
Spillover utilization
Capital expenditures

3. Networking
R&D alliances and joint
ventures
Supplier and customer
integration

Revenues, earnings, and

market share

Clinical tests, Food and

Drug Administration
approvals

Innovation revenues
Patent and know-how
royalties

Beta tests, working pilots

Knowledge earnings and

assets

First mover

9. Growth prospects

6. Internet

Product pipeline and

launch dates

Threshold traffic
Online Purchases
Major Internet alliances

Communities of practice

Expected efficiencies
and savings
Planned initiatives
Expected breakeven /
cash burn rate

In addition, companies need management processes that permit quick and efcient exchange
of background knowledge between individual managers to ensure optimal usage of this
information and enable managers for dynamic strategy and performance management. Such
processes include a strategic management process that establishes a continuous strategic
dialog throughout the company and thus ensures that the company remains ahead of external
developments that could harm its competitive position and the value of its competence base.
Companies must also have a process for performance management that optimizes the
exploitation of existing assets and potential in order to achieve short-term protability goals.
Both ``enterprise management processes'' need to be linked with operational management
processes through clearly dened checkpoints (see Figure 3 right side).
The main intention of this concept is to enable managers to react fast to changing market
conditions in order to leverage new opportunities and to systematically limit known and
emerging new risks. It should enable managers to optimize enterprise performance and its total
efciency in a dynamic environment. This is important, because the dynamics, volatility, risks,
and trade-offs in the business system increase with the level of intangible assets. Instead of an
annual planning exercise as it is usually triggered by the annual budgeting process, planning
becomes an integral part of the monthly or weekly performance management process. A
key support process for this is forecasting. Its intention is to bring changes in the underlying
business conditions to the fore and allow managers to do something about it before they
materialize both from the strategic perspective in order to adapt the overall value creation

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Figure 3 The management system (Daum, 2002)

Tableau de Bord

Management Proceses

Overall View

Adapt/Define
Strategy

Financial Results

Market / Customers

Revenues, Profit, EVA

Return on Intangible Assets

Market shares
Customer satisfaction
Reliability

Change Management

Processes / Resources

Supply chain efficiency

Value added per person
IT efficiency

Strategy
Management
Process

Define
Objectives

Forecasting

Status project 1
Status project 2

Product/Market Development View

Discovery
No. of successful
discoveries
No. of usable
suggestions from
the user groups
Effectiveness of R&D
Alliances

Implementation

Commercialization

Return on development investments

No. of registered
patents
Success and error
quota of beta tests
Time-to-market

No. of marketing
partners
Market shares
Innovation revenues
(revenues of
products < 2 years)
Brand value

Performance
Management
Process

Measure
Performance

Check Technical
Feasibility

Prototyping

CRM Cockpit

Delivery reliability
Lead time
Utilization / costs
SCM flexibility

Market Research

Product Lifecycle
Management
Implementation

Operational View
Average customer
lifetime value
Lead conversion rate
Customer satisfaction
Service quality

Decide
how to adapt

Adjust
operations

Go Decission

Supply Chain Cockpit

Strategic
Analysis

Production
Planning

Demand
Planning

Engagement
Sales

SCM
Procure
Raw Material

Test & Release

Business
Development

Lead
Generation

CRM
Delivery

Production

After Sales
Support

Customer
Service

Resource Management View

Human Resources
Productivity
Vacancies quota
Fluctuation

Information Techn.

Finance

Cost efficiency
Reliability
Service quality

Working capital
employed
Costs per
transaction

HR

Assets

Finance

Support Processes/Resource Management

recipe of the company when needed, and from the performance management perspective to
manage trade-offs, leverage opportunities and limit risks in order to optimize short term
performance. This focuses the attention of managers on the future instead of the past.
Such a management system enables managers to make better decisions which help to achieve
sustained protability. It becomes itself an important production factor and a major part of the
enterprise's organizational infrastructure. Having such a system in place, a company is able to
improve also external corporate reporting and communication.
Forward looking and holistic corporate reporting
The objective of corporate reporting is to provide investors and other external stakeholders with
a better insight into the enterprise. By giving them an overview of all value-creating activities
from an economic view-point it should allow stakeholders to better assess the true potential
of a company as well as its ability to achieve sustainable results. For example, in addition to
nancial statements, companies could publish supplemental information on business strategy
and business models, along with operational and intangible key performance indicators via so
called supplemental corporate reports. Working groups of the US Securities and Exchange
Commission (SEC) and Financial Accounting Standards Board (FASB) have suggested
this approach (SEC, 2001; FASB, 2001). The ``intellectual capital statements'' proposed by
the Danish government or the MERITUM guidelines represent a similar step (Marr et al., 2003;

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VOL. 8 NO. 1 2004

Daum, 2003a). Thus, the same concept that is used for internal enterprise management, as
described above, can be used as a basis for external corporate reporting. It might be less
detailed than the internal performance reporting systems and some information will be excluded
from the external reports for competitive reasons. To enable this kind of practice to gain
widespread support, industry-specic standards for key indicators and reporting layout are a
necessity (DiPiazza and Eccles, 2002). Also a simple ``push'' procedure will no longer be
sufcient in external reporting. Important stakeholder groups must be included in a constant
and active dialog to retain their commitment to the company. Today, companies need to
maintain a continuous and active bi-directional dialog with important external stakeholders in
order to get and keep them engaged in the enterprise: stakeholder relationship management
becomes a daily top management task and needs therefore to be integrated with the internal
management processes.

Enterprise total factor productivity

Having in place an integrated framework, including enterprise model, management system,
corporate reporting and communications, does not only allow managers and investors to
understand the performance of an enterprise, it also allows them to better understand the
business economics of organizations. Following the changes of indicators in one area and
watching their effects on other areas will help them to understand the sensitivities and the
economic logic that rules within their business model and ``organizational recipe''. This enables
them to better estimate the effect certain market changes or management actions will have on
company performance and on the future value and on the potential in its current competence
and assets basis. However, this kind of ``learning'' is still based on estimations and subjective
assessments. What is missing is an objective measure for the productivity and efciency of the
total system, which can serve as a reliable reference for the evaluation of the impact of changes
in single value creating processes, procedures and assets/resources on total enterprise
performance. The concept of enterprise total factor productivity provides this kind of
measurement and reference (Lev, 2002a).
``Total factor productivity'' is a term used in macroeconomic growth theory. Macroeconomic
growth theory deals with the economic development of nations, with special focus on the
drivers of growth (measured for example by GDP change). These drivers fall into two categories:
(a) Increases in factor inputs, such as growth of the labor force and capital investments
(property, plant and equipment); and
(b) improvements in total factor productivity the total productivity of the factor inputs.
For example, the gross product of corporate businesses in the
USA increased in 2000 (relative to 1999) by $443.2 billion, while
consumption of physical capital increased by $57.9 billion and
the compensation of employees by $289.1 billion. Thus, the
aggregate spending of $347.0 billion on capital and labor in 2000
produced an increase of the gross product by $443.2 billion
$100 billion more than the increase in total factor input. The
cause for this ``added value'' can be found in the US economies
total factor productivity the efciency of its corporate business
processes, organizational designs and incentive systems, which
is enabling US corporations to generate an output level
substantially higher than invested inputs.
An efcient organizational infrastructure enables the company to
generate value added from the invested resources. This added
value relative to invested inputs reects the productivity margin
of the enterprise and represents the source of shareholder
value and employee and stakeholder welfare. The organizational
infrastructure enables the enterprise to use its resources in a
productive manner, resulting in enhanced productivity, prots, and
shareholder value. It reects the company's unique capabilities to

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PAGE 13

create value from commoditized resources (see Figure 4). Because the organizational
infrastructure is of unique nature, it is not an asset or capital, but an enabler of all other assets,
tangible and intangible, that supports them in their specic function in the enterprise's value
creation system.
Since the contribution of the organizational infrastructure to productivity is essentially a
reection of managerial capabilities and their execution, the enterprise total factor productivity
can serve as an objective basis to assess management's capabilities and success. If for
instance two companies, A and B, increase capital investment from 100 to 110 units, while A's
product grows 10 percent and B's 20 percent, the conclusion is that B's management was
more capable than A's. This approach to evaluate the enterprise total factor productivity, i.e. the
efciency of a companies' organizational infrastructure, provides new valuation and control
tools for managers and investors (Lev, 2002b).
Measurement of enterprise total factor productivity
To gain quantiable insights into the value and impact of organizational infrastructure, Lev and
Radhakrishnan (2002) developed a methodology for valuing company-specic organizational
infrastructure. The estimation process is schematically depicted in Figure 5.

Figure 4 The value-creation chain based on the organizational infrastructure

(Lev, 2002b)

THE ENABLER

RESOURCES
PHYSICAL
CAPITAL

LABOR

CUSTOMERS
: Brands,
Trademarks

INNOVATION:
R&D, Adaptive
Capacity

PRODUCTIVITY

PROFITS/VALUEADDED
SHAREHOLDER VALUE

Figure 5 The valuation of organizational infrastructure (Lev, 2002b)

RESOURCES/INPUTS

Product
Growth

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VOL. 8 NO. 1 2004

Organizational
X

Infrastructure

Lev and Radhakrishanan determined through statistical analysis for a sample of 300 public
companies the contribution to revenue growth of the four major resources: physical assets,
labor, brands, and R&D. The results show that some companies are more productive than
others. They generate higher revenue growth from the same given level of resources than other
comparable companies. Figures 6 and 7 show the average annual contribution of organizational
infrastructure to product growth between 1995 and 1997 for some selected companies
(dark bar) against subsequent stock performance over 1997-98 (bright bar). The measure of
organizational infrastructure, i.e. enterprise total factor productivity, captures and shows the real
growth potential, which leads in subsequent years to shareholder value creation.
The organizational infrastructure measure seems to provide a far better insight into a company's
growth potential. The research by Radhakrishnan and Lev indicates that investment in the
organizational infrastructure, in good management and good management systems, clearly
pays.

Conclusion and outlook

Productivity is the top priority of nations and business enterprises. Increased productivity
of resources is the major driver of nations' welfare (standard of living, employment), and of
companies' prots and shareholder value. But productivity management and optimization, as
many believe, does not start with the valuation of individual intangibles, undoubtedly major
drivers of growth and value. In fact, it should start with an understanding of the role intangibles

Figure 6 Organizational infrastructure and shareholder value for selected chemical companies (Lev, 2002b)

Chemical

Dow Chemical
Stock Return

E-TFP

Du Pont

FMC Corp

-1

-0.5

0.5
Return(97 to 99)

1.5

2.5

[OI(97)-OI(94)]/OI(94)

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Figure 7 Organizational infrastructure and shareholder value for selected retail companies (Lev, 2002b)

Retail

Home Depot

Wal-Mart

K-Mart

-0.6

-0.4

-0.2

0.2

0.4

0.6

0.8

Return(97 to 99) [OI(97)-OI(94)]/OI(94)

play in the overall ``value creation system'' of an organization. Thus, the corporate organizational
infrastructure as enabler for generating value added from input resources, both tangible and
intangible, becomes the critical factor and driver of enterprise total factor productivity.
Macroeconomic studies estimate that about one-third of the differences in income per
capita among countries comes from differences in capital, and the remaining two-thirds from
efciency differences (Clark and Feenstra, 2001). That efciency is also the major source of
differences in the performance of business enterprises. Corporate executives that are interested
in measuring the performance of their business as a whole should therefore pay more attention
to the total factor productivity of their company and its major driver: the efciency of the
organizational infrastructure.
The above-described concept of organizational infrastructure provides a measure of enterprise
efciency relative to others. Thus, it can also be used to support management in optimizing the
total factor productivity of their enterprise. Correlation analysis between an enterprise's total
factor productivity and a set of detailed key performance indicators for the major operational
value drivers and value creation processes, as presented in the Tableau de Bord above, might
help to identify the major levers for value creation. This type of analysis might become an integral
part of a company's performance management process in the future: a institutionalized check
in the analysis and planning phase to identify in a systematic way optimization opportunities
from a total factor productivity perspective. This will allow a company to constantly optimize its
enterprise total factor productivity. It will also enable it to adapt its business processes and
business model to changes in the market place, which usually causes disruptions in its value
creation system, without loosing productivity or to at least to regain quickly the former

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productivity level. The above outlined approach could contribute to standardized measurement and reporting of how intangibles drive performance. In the long-run, when companies
disclose such measures more widely, this approach would allow us to perform more detailed
macro-economic research to further investigate the value creation of intangibles.

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