Intellectual Capital of Microsoft Inc - Essay Example

Microsoft Inc- Intellectual Capital – An Analysis Research Questions The study seeks to highlight the importance of the intellectual capital to the financial performance of the organization. As opposed to simply considering human capital management as a detail for the company’s management, the paper looks at it from an accounting point of view. The research questions thus include; a).How does the quality of employees affect organizational performance? b).What are the costs of acquiring new employees for an organization? c).What is the real value of a company’s employees on the financial statement? Analysis of the intellectual capital for the Microsoft Corporation. Before I can make an analysis of the intellectual capital for Microsoft Inc., there are some crucial factors that need to be put forward. It is very imperative to point out that intellectual capital is nothing but a combination of skills, intelligence, talent, and knowledge of the company’s human force that in turn differentiates them from its competitors. The knowledge of an organization is what is at time referred to as the brain power; therefore, intelligent capital can be viewed as the intangible assets used by the company in the making of its services and products. Intellectual capital, therefore, can be assumed to be the fundamental aspects of the company’s profit and loss statements, as well as its balance sheets. As such, the value of a business is, therefore, comprised of its revenue generated through its intellectual talents, financial assets, intellectual assets, and physical assets (Barney, et al., 2001). Three elements of intellectual capital include: Human Capital: Human capital mainly comprises of the values provided by business employees through application of expertise and skills ‘know how’. This component of intellectual capital is not owned by a company, and therefore when an employee leaves the company, the human capital consequently decreases (Peloso, 2008). Human capital can, therefore, be used to measure how effective a company is using its people resources as a measure of innovation and creativity. Structural Capital: Structural includes the supportive infrastructures, databases and processes of an organization that enables the human capital to function. Components of structural capital include buildings, processes, software and so on. Additionally, structural capital also includes things such as information system, proprietary databases, research and development infrastructure facilities and organization’s image. The diversity of structural capital demands that it is broken down into: process, innovation, and organization capital. Process capital includes procedures of programs and the techniques that implement and enhance the delivery of services and goods. Innovation capital includes intangible assets and intellectual properties of the corporation. Organizational capital, on the other hand incorporates the entire organizational knowledge such as intellectual property, systems and so on (Hunger &Wheelem, 2010). This entailed its goodwill produced out of its relationship with agents, governments, partners, the brand image as well as the clients. Process capital includes procedures and programs that execute and increase delivery of services and goods. Innovation capital entails intellectual intangible assets and intellectual properties of a company. Relational Capital: A company’s licenses, franchises and trademarks all belongs to this category of intellectual capital. Precisely, relational capital also includes aspects of a business that are less definable such as relationships and customer interactions. Analysis In the year 2014, Microsoft recorded $6981 millions (net) in intangible assets. (Microsoft Annual Report 2014, 43). In the year 2010, Microsoft recorded $1158 millions and in 2011, it reported $744 millions as intangible assets (Microsoft Annual Report 2011, 44). In the year 2013, the Microsoft recorded $3987 millions on intangible assets. From this, we can understand that Microsoft had increased its spending on intangible assets more than 600% in 2014 as compared to 2010 figures mainly to enhance its intellectual captal spread to differentiate it from its competitors. This figure is a bit lower as compared to the year 2012 which was $6789 millions. This reveals that in the year 2012, Microsoft invested mainly in intangible assets as compared to 2013. Nevertheless, given that most of the intellectual capital is being found in the intangible assets, my axiom shall rely on figures recorded in the section of intangible assets. However, since intellectual capital is mainly found in the intangible assets, the assumptions made in this research are based on figures that have been recorded under the intangible assets section. Human Capital Human capital is more significant to the company, since, as a software company, the employee’s skills, and knowledge are required to be exemplary where the competitors are trying to capture the market with their new technologies. Meaning from the 2013 results, the company invested a little on human capital, and the result were evident for these consecutive years (Baron & Armstrong, 2007). However, by looking at their development and research column of the income statement, the company recorded a greater figure in 2013 as compared to 2012 hence the research question coined is “what is the cost of acquiring new employees to the organization?”. In 2014, Microsoft recorded $11,381 millions in R&D expenses (Microsoft Annual Report 2014, 41). In 2011, Microsoft recorded $ 9043 millions and in 2010, $ 8714 millions as R&D expenses (Microsoft Annual Report 2011, 43). In 2013, Microsoft recorded a figure of $25678 millions, which is higher than that of 2012 (Microsoft, 2013). As compared to 2013 figures , Microsoft spent 125% less in 2014 on R&D expenses. This denotes that Microsoft is still harnessing on the earlier years spending on R&D. The 2012 figure was at $15895 millions, this means that in 2013, the company invested more in their development and research for the purpose of enhancing their employees’ ability and skills towards developing new products (Marr, 2005). There is no separate detail available about employee severance expenses in Microsoft Annual Report 2014 but it was mentioned that it was included in its general and administration expenses head. It reported $59 million as employee severance expenses in 2010 and it did not report any such expense in 2011 (Microsoft Annual Report 2011, 48). Additionally, the company incurred an $8009 millions as employee severance expenses in 2013though it did not report it in the year 2012. The employee severance expenses incurred for the year 2013 might be due to hard work or as a result of the fact that they had to lay off some of their employees in 2013. Further , the high severance costs incurred during 2013 was due to cost associated to the settlement of labour dispute in South America. The little investment the company made in human capital is the only reason why Microsoft’s intangible assets for the year 2012 were less compared to that of 2013, where the company invested more in human capital to steer its projects at the right time. However, for both periods, it is evident that the company did spend on employees. The company spent sizeable amount of money on employees during this period because they were engaged in the development of its new product- Windows 8 (Microsoft, 2013). This project not only required a lot of research and development efforts, but also required employees who have high software programming skills as well as studying skills. This is the period in which many number of University students possessing good programming skills are employed by the company as interns. However, since the figure for 2013 are higher as compared to those of 2012, it is presumed that there were lot of initiatives carried over in 2013 than as contrasted to what were carried over in 2012.Most probably the development of the company’s new software known as Windows 8 was still at its nascent stage and for accomplishing this task, perhaps, Microsoft would have required the employment of extra workforce to perform other simple tasks such as data collection. Microsoft employment strategy, which includes the hiring of interns and by using temporary short-term contracts, which costed the company a total of $45,789 millions in 2012 and $54,325 millions for 2013. For 2014, 2011 & 2010, no such figure is available in Microsoft annual report. The company also spent more money for conducting research and development on their upcoming events. As such, it is evident that Microsoft spent large amount during year on human capital resources. Conversely, the employment factor might as well be proved wrong by the company’s revenue. Cost of income in 2014 stood at $22074 millions (Microsoft Annual Report 2014, 43). Microsoft recorded $ 38,386 millions in 2010 and $42,782 millions in 2011as cost of income (Microsoft Annual Report 2011, 43). In 2013, it stood at $17,456 millions while that for 2012, it stood at $15,394 millions (Microsoft, p.319 2013). As compared to the year 2010 and 2011 , Microsoft had reduced cost of income in the 2014 and this denotes that Microsoft is able to control its expenses in the year 2014. The company’s higher cost of income can as well be linked to the fact of Microsoft’s employees who were putting extra efforts to generate more revenues for the enterprise. Despite the difference in figures on the company expenses between the two years, the employee capital was greater in terms of revenue it earned for the company during this period. Therefore, until a model which can be used in the measuring of human capital can be designed, then this analysis will still be based on assumptions which are generated by the observation of numbers recorded on the company’s financial statement (Microsoft, 2013). Structural Capital The analysis of structural capital for Microsoft, I am going to focus only on assets such as goodwill and long-term assets. The aim of the study is to reveal how the company did so far during the year 2013 and 2012. Therefore, when focusing on the company’s financial statement, it’s evident that Microsoft had an equipment and property that amounted to a total of $13011 millions in 2014, (Microsoft Annual Report 2014, 43) $9235 millions in 2013 and $6895 millions in 2012 (Microsoft, 2013). In 2010, it reported $ 7630 millions in 2010 and in 2011, it reported $8162 millions as equipment and property (Microsoft Annual Report 2011, 44). In 2014, Microsot invested 70% more in equipment and property as compared to 2010 figures and this demonstrates that its investment on equipment and property is increasing in proportion to its expansion. The figure evidently shows that the company experienced a decline in the value of their equipment and property assets. Their property might include things such as working computers and buildings, as well as little things such as a touchpad belonging to the organization. During the same year, it can be seen from the financial statement, that the company had difference in the amount of goodwill recorded. In 2014, Microsoft recorded $20127 millions in goodwill (Microsoft Annual Report 2014, 43). In 2010 , Microsoft recorded $ 12394 millions in 2010 and $ 12581 millions in 2011 as goodwill (Microsoft Annual Report 2011,44).For the year 2013, the company recorded goodwill of $58,576 millions which is slightly less by hundreds to the figure it registered in 2012 (Microsoft, 2013). In the year 2013 , Microsoft spent more than 470% in goodwill as compared to 2010 figures. This deonotes , in the year 2013, Microsoft spent higher spending in acquisitions as compared to 2010,2011&2012. This does show that the goodwill contributed to the substantial rise in the structural capital for the company. In the financial statement, there is a figure showing that the company had quite a lot of assets in their long-term assets. But when the years are compared, the long-term assets for 2013 were lower than those of 2012. In 2014, Microsoft long-term assets stood at $3422 millions. (Microsoft Annual Report 2014, 43). In 2010, Microsoft recorded $ 1501 millions and in 2011, $1434 millions as long-term assets (Microsoft Annual Report 2011, 44.). This denotes that Microsoft spent 225% more in long-term assets in 2014 as compared to the year 2010. In 2013, its long assets stood at $1837 millions while that of 2012 stood at $2956 millions (Microsoft, 2013). This demonstrates that Microsoft invested heavily in its long-term assets which include assets such as building, servers, data warehousing, R&D tools, etc. It is the Microsoft’s investment on equipment and other assets together along with other properties that have enabled human capital for the company to have adequate knowledge that is required to accomplish the demanding tasks. However, but for the human capital, it would not have been simple for a company to record high revenues in the two years without the help of structural assets. This aspect is not really shown in the financial statement, but by following the logic that states, structural capital improves human capital function to their level best, it means that having a lot of structural capital means high human capital as well increase the degree of knowledge the human capital can acquire. Structural capital and human capital in this financial statement go hand in hand, because when we focus on the company’s financial income for 2012 as well as the balance sheet, the company’s total assets stood at $78,397 millions while the revenue stood at $29,943 millions for the same period. Consequently, the data for 2013 was at $18,756 millions while the company’s total current assets stood at $85,687 millions (Microsoft, 2013). In 2010, Microsoft recorded $18,760 millions as net income and it reported $ 55676 millions as current assets. In 2011, Microsoft recorded $23,150 millions as net income and it reported $74918 millions as current assets (Microsoft Annual Report 2011, 44). In 2014, Microsoft recorded net income of $ 22074 millions and its total current assets stood at $ 114,246 millions (Microsoft Annual Report 2014, 43). In 2014 , Microsoft’s net income recorded an increase of 18% as compared to 2010 year figures and fits current assets recorded an increase of 205% in 2014 as compared to 2010 figures.Therefore, by studying this picture, it means that the more the structural capital increases, the more the human capital also becomes stronger. The operations of a company are driven by the human capital, and therefore, while the operational income for Microsoft increases, one can conclude that Microsoft invested heavily on its human capital for it to reach this state. And since this is the case, one can as well make the assumption that the availability of the structural capital or what is commonly referred to as organizational capital, is the main factor that has made the company realize an increase in its revenue. Relational Capital Relation capital is the value that is inherent in the company’s relationship with its vendors and customers. It includes franchises, licenses and assignment of trademarks among others. These things, however, are not listed in the corporation’s financial statement, though their presence can be felt (Intellectual Property, 2005). Microsoft Corporation possesses a lot of customer relationships that includes corporations using their products such as office enterprise, as well as windows server edition. Though it is not recorded in the company’s financial statements, they exist within company’s investments such as equity. Furthermore, the fact that even though these investments are not visible but provides the room for assumption that these investments might include things such as franchises. The company’s investment in relational capital has seen it to regain its market share, and level playing field for most technological businesses that initially were enjoying monopoly (Journal of Human Capital, 2007). Other investments such as operations and revenue are very significant since they assist by contributing money used in driving the company forward. As such, we can be sure that Microsoft has a lot of revenues from franchises operations and trademarks assignment throughout the world. And as long as this franchise, trademarks and other aspects such as customer relations exist, Microsoft will continue to realize higher revenues. Therefore, as the three aspects of IC for Microsoft which have been discussed, we can also assume that all the three aspects are interconnected with one another, and they all enable the creation of the income statement and the balance sheet of the company, since without IC, Microsoft may not have been enjoying its profits as windows 8 is a hot selling product in international market. Measuring Intellectual Capital Although the analysis of Microsoft’s intellectual capital uses certain aspects of the financial reports, there is no evidence that this is precisely the case with the company. In the actual sense, IC cannot be given in terms of monetary value which, therefore, means that the above analysis is based mainly on assumptions as opposed to facts (Hunger, 2007). The financial statement also does not record any values to show either that Microsoft human capital at no particular period of time, for instance was 60% nor does the structural capital used for the measuring of this capital. Nevertheless, it is to be noted that by studying the financial statements for both 2012 and 2013and bearing the fact that it is within the IC ability that a company is able to efficiently run, which leads to the above assumptions made about Microsoft. Conclusion This study explored in detail about findings of authors given in the reference section of this research study about how intellectual capital is able to differentiate itself from its competitors with the particulare emphasis to Microsoft Inc. For example , the study used the Brooking (2007) findings how Microsoft used its employees knowledge , experience , innovation capabilities , leadership power , attitudes of its employes to harness innovation and creativity for its growth and success. As per Caenegem (2010) study, Microsoft is deriving its lion’s share of revenues from commercializing its innovations and hence, IC has become the core asset for the Microsoft. If we compare the physical assets of the Microsoft, it is in a tiny proportion as compared to its market capitalization and the difference between the market capitalization and Microsoft’s physical assets comprises its intellectual capital. Thus, from the Microsoft, we can learn that every additional contribution through an information-oriented product or service would naturally result in the increase in its marginal returns. As per Amidon (2010), Microsoft should identify its talented employees and should reward them with stock options and other monetary incentives to retain them with the company. Further, it should also encourage students who have intelligent ideas who can bring new innovative products to the company. As per Baron & Armstrong (2007), by acquiring companies that have developed some innovative products or services, it may add up the value of its intellectual capital. Thus, to remain as a market leader, Microsoft is to strive hard to develop its intellectual capital constantly. References Amidon, S. (2010). Human Capital (2nd ed.). New York: Farrar, Strauss, and Giroux. Bainbridge, D. (2009). Intellectual Property. Harlow: Longman. Baron, A., & Armstrong, M. (2007). Human Capital Management: Achieving Added Value through People (4th ed.). London: Kogan Page Ltd. Bloomfield, S. (2008). Venture Capital Funding: A Practical Guide to Raising Finance. London: Kogan Page. Brooking, A. (2007). Intellectual Capital (3rd ed.). London: International Thomson Business Press. Caenegem, W. (2010). Intellectual Property (3rd ed.). Sydney: Butterworths. Chase, R. (2007). Intellectual Capital Reporting. Bradford: Emerald. Chatzkel, J. (2012). Intellectual Capital (2nd ed.). Oxford: Capstone Pub. 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