An Organizational Capital Decision Model for Knowledge-Intensive Organizations

Using several factors essential to determine the income of a knowledge organization, we formulate a mathematical programming problem for allocating the firm's capital budget between organizational and physical capitals. We solve this problem to obtain an analytically tractable and easy to implement decision rule to enhance the firm's expected income and, subsequently, value. The model applies interconnections of these capitals and their constituent variables in the context of the firm's valuation through the growth of its operating income. Finally, we illustrate our findings by studying the capital allocations of IBM, Microsoft, Oracle, SAP, Symantec, EMC Corporation, Hewlett-Packard, and CA Technologies, which constitute eight of the ten of the world's largest software companies. We use the data from their financial statements covering the period 1991-2015, and find that the companies that had a stable policy setting higher priority on their budget for organizational capital enjoyed superior financial performance over the 25 years of our study. Professionals in the field of engineering and technology management can benefit greatly from the findings of this study as they can use it to justify the firm's capital investment budget for organizational capital, because it typically includes items of greater interest to them such as the intangibles, intellectual property, and human capital. The paper gives directions for future research in the relatively new area of organizational capital.