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336 Chapter 9

Intellectual assets also come from widening the aperture of the lens used to see
intellectual assets. For example, by looking to contractors and consultants who
develop intellectual assets for the company, the company is likely to discover assets
it owns that had not been considered. In the process that links identifying intellectual
assets to extracting them for profi t, a company will often see opportunities to create
new intellectual assets. A company can cultivate creativity to create assets, which can
be identifi ed and extracted for profi t to the organization.
Lev (2001) views intangible assets as nonscarce. Deployment of an intangible asset
is possible at the same time in multiple uses. Intangibles increase in value when used.
This is also referred to as scalability: the value of intangibles increases when the scale
at which they are used increases. Intangibles are not subject to diminishing returns
as are tangible assets, but have increasing returns. Intangibles also have strong network
effects. Although not exclusively applicable to intangibles, network effects are char-
acteristic for intangibles in the sense that intangibles often form the core of important
networks.
Intangibles create future value. All intangibles are future-oriented and because of
this they are ignored by traditional accounting systems based on conservatism and
materialism.
Intangibles are diffi cult to manage and to exclusively control. Taking full advantage
of the tacit knowledge residing in employees is more diffi cult than exploiting the value
of a building or a machine to its maximum. Copying or re-engineering of intellectual
assets is often relatively easy, and we have limited ability to protect using property
rights. Cost accounting systems are not well geared toward intangible assets, and are
even wholly inaccurate for managing intangible assets-intensive corporations. Intan-
gibles cannot be owned (except legal property rights). Intangibles investments are
therefore typically more risky due to the fact that intangibles play the most dominant
role in the early stages of the innovation process. Proper management can deal with
this, that is, R & D alliances and diversifi ed innovation project portfolios.
Intangible assets are nonphysical and therefore inherently diffi cult to trade. Legal
protection is weak. There are large sunk costs and low marginal costs. Open exchanges
for intangibles are in their infancy. Intangibles cannot directly be measured. Valuing
intangibles is diffi cult. Intangibles are not evidenced by fi nancial transactions (as
tangibles are).

Key Points

• KM auditing is often the fi rst step in any KM initiative as it serves to inventory what
knowledge-intensive resources exist within a company. This provides a snapshot of