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UTILIZING CAPITAL EFFECTIVELY

- THE FOUNDATION FOR BUILDING


SUSTAINABLE ADVANTAGE

NIGEL A.L. BROOKS

THE BUSINESS LEADERSHIP DEVELOPMENT CORPORATION

Article reprint
UTILIZING CAPITAL EFFECTIVELY
- THE FOUNDATION FOR BUILDING SUSTAINABLE
ADVANTAGE

Enterprises are built on a foundation of natural, human, intellectual, and


financial capital, which must be managed effectively and efficiently.
Understanding the costs, risks, and returns associated with each form is
essential to building sustainable advantage.

In economic theory, land, labor, and capital resources are the three factors
of production and distribution of goods and services. In free markets,
production and distribution activities are intended for profit, and the prices
that determine gross revenue are set by supply and demand. Net income
results from operating profit (revenue less cost and expenses), dividends,
net interest, gains on sales of capital assets, and other miscellaneous items.
Net interest income comprises interest revenue less interest expense. Net
income creates wealth, which is a source of future capital, and so the cycle
repeats.

Land is a collective term for natural capital. Labor is a collective term for
human capital and the intellectual capital it uses. Labor includes
entrepreneurs, executives, managers, and associates (supervisors and
staff). Intellectual capital includes but is not limited to those methods that
are learned as competencies (knowledge and skills). Capital, or more
specifically financial capital, means wealth in the form of money or
monetary equivalents used in the production and distribution of goods and
services, and is intended to generate income.

Entrepreneurs can be considered to be a distinct factor of production and


distribution separate from the other three; economies would not exist with
them. However, management competencies are required to organize
production and distribution activities to generate income.

Utilization is about practical use of assets - capital has a cost, and


therefore must be used effectively and efficiently. It is important to
understand the costs, risks, and returns associated with the use of each
type of capital resource.

Sustainability is about being able to provide for current generations


without damaging the ability of future generations to provide for
themselves. Sustainable means being able to continue over time, either by
developing, enhancing, or maintaining the current state, or by changing it.
Advantage means favorable, superior, and beneficial.

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Natural:

Natural capital represents anything related to the environment that is used


by the enterprise, and is the initial source of all raw materials, including
air, soil, and water. Sustainability is especially important with respect to
the use of natural capital. Misuse of natural capital damages the
environment.

Historically, natural capital has been available at lower cost than its real
value because sustainability has been ignored. In the future, natural
capital is likely to cost more to cover both the remedial efforts to repair the
environment, and the preservation efforts going forward. The risk of
investment is misuse, which be lowered by avoiding the use of
contaminants and pollutants, and by encouraging energy conservation and
recycling programs. Opportunities should be pursued to use alternative
fuels and other materials that do not impact the environment negatively.

"Green" profit improvement programs are initiatives that can be put in


place to find alternative resources and processes that are environmentally
friendly, and to find offsets to any increased costs that may be incurred.
The economics related to the use of natural capital can change
dramatically if sustainability is pursued with vigor. A paradigm shift is
occurring towards the ecological economy.

The return on investment in natural capital results in higher quality


resources such as pollution-free air, purified water, and contaminant-free
soil. Such resources have significant benefits over the long-term,
especially for quality of products and/or services, and for health.

Human:

Human capital, otherwise referred to as "human resources," represents


those characteristics of individuals that enable them to be economically
productive for both themselves and the enterprise. Human resources
comprise both employees and independent contractors. The
characteristics of human resources include confidence, competencies,
experience, and commitment.

An enterprise is dependent on its human resources for results - process and


product/service capabilities are a function of people capabilities.
Therefore, it is important that human resources are developed to their full
potential.

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Ongoing education and on-the-job training programs to develop
knowledge and skills are essential to keeping individuals economically
productive as conditions change. Hence, education and training programs
should be considered to be an investment, not an expense, when relevant.
Well educated and trained employees must follow responsible leadership
that motivates them to be productive and efficient. The value of well
educated, trained, productive, and efficient human resources appreciates
over time. However, to use human resources the most effectively, it is
important for management to obtain feedback from its people, especially
those on the front line.

The risks of investment in human resources include individuals that are


unwilling or unable to reach their full potential, or leave. The result is
wasted education and training efforts. The return on investment results
from the enterprise becoming more effective and efficient. An enterprise
can also contribute educated, trained, productive, and efficient human
resources into the local community for the social good.

Intellectual:

Intellectual capital represents knowledge that gives an advantage, and


hence must be protected. The more proprietary the knowledge is, the
more the advantage that can be gained because competitors cannot use it
without a licensing agreement. Intellectual capital is derived from people
(human capital), and is manifested in processes and functions, and in
products and/or services.

Intellectual capital defines the enterprise and product and/or service


brands, builds a competitive barrier, provides a defense against other
holders of intellectual property, and increases revenue generation and
financing opportunities. More specifically, it consists of data, formulae,
licenses, recipes, service marks, software, trade dress, trademarks, trade
names, trade secrets, and written materials.

Intellectual property can be protected through copyrights, patents, and


registrations of service marks, trademarks, and trade names. Patents are
public information.

Almost every enterprise has some form of intellectual capital ranging from
the "secret sauce" in the recipes of menu items at lifestyle restaurants to
the code in Microsoft Windows. The Coca-Cola Company has a secret
recipe for the ingredients of the world famous beverage, and non-generic
products of pharmaceutical enterprises are covered by patents.

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The risks of investment in intellectual capital include its failure to perform
as specified, which could cause product liability claims, or its inability to
generate income at all. The returns on investment include profits from
competitive advantage not otherwise available, and revenue from licensing
opportunities offered to third-parties.

Financial:

Financial capital represents money and monetary equivalents, and consists


of equity (ownership) and debt (long-term loans in various forms) invested
in the enterprise as operating and investment capital. Equity comprises
capital stock, current period income, other comprehensive income, and
retained earnings less treasury stock. Operating capital is used to finance
activities in the current cycle, and investment capital is used to finance
capital assets, such as facilities and equipment, and positions in other
enterprises. Operating capital can also be sourced from advances,
borrowings, credit extensions, and short-term loans that are not considered
part of the capitalization of the enterprise.

The risks of investment in financial capital include losses from revenues


not covering costs and expenses, and depreciation because fair or market
value is lower than cost. The returns on investment include profits from
revenue in excess of costs and expenses, gains from appreciation because
fair or market value is greater than cost, and from dividends and net
interest income.

***

In a knowledge-based economy, the value of intellectual capital and the


human capital that uses it is increasing. "Tribal knowledge" represents
know-how within the enterprise that is essential to delivering products
and/or services, and must be captured in practices such as policies,
processes, and procedures. Using business intelligence as information for
competitive advantage can be a differentiator in the marketplace.
However, the greatest opportunities may be in the delivery of knowledge-
based products and/or services that result from digital construction and
manufacturing processes. Innovation, infrastructure, and information are
three factors of production in a knowledge-based economy. Knowledge is
only of value if it is put into practice.

Utilizing capital effectively is an enterpriship (entrepreneurship,


leadership, and managerial) competency.

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For more information...

For information about audiobooks, books, earticles, ebooks, and eseminars


offered by The Business Leadership Development Corporation visit
www.etailia.com

For more information about the discipline of enterpriship visit


www.enterpriship.com

To assess your individual competencies in thirty minutes or less, claim


your opportunity for instant access when you go to
www.individualcompetencies.com

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About Nigel A.L Brooks...

Nigel A.L Brooks is a management consultant to entrepreneurs, business


enterprise owners, executives, and managers, and the enterprises they
serve. He specializes in developing the entrepreneurial, leadership, and
managerial competencies that build sustainable advantage from vision to
value. He is an author and a frequent speaker.

He obtained his professional experience as a partner at Andersen


Consulting (now Accenture, Ltd.), as a vice president at Booz Allen
Hamilton, Inc. (now Booz and Company), as a senior vice president at the
American Express Company, as president of Javazona Cafes, Inc., and as
president of The Business Leadership Development Corporation. He has
been a contributing editor for the Bank Administration Institute magazine,
and has served on boards of entrepreneurial networks. He was educated at
the University of Exeter, Devon, United Kingdom.

His clients are in the financial services, food services, high-tech,


manufacturing and distribution, pharmaceuticals, oil and gas, professional
services, retail and wholesale, transportation, and government industries.

He has experience in North and Latin America, Europe and Asia-Pacific.

www.nigelalbrooks.com

About The Business Leadership Development Corporation (BLD)...

The Business Leadership Development Corporation is a professional


services firm that works with entrepreneurs, lifestyle business enterprise
owners, executives, and managers, and the enterprises they serve.

BLD develops entrepreneurial, leadership, and managerial competencies


that achieve performance excellence by building sustainable advantage
from vision to value through:

 Strategic Management Consulting


 Executive Coaching and Mentoring
 Professional Training via The Center For Business Leadership
Development (CBLD)
 Motivational Speaking

www.bldsolutions.com

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THE BUSINESS LEADERSHIP DEVELOPMENT CORPORATION
13835 NORTH TATUM BOULEVARD 9-102
PHOENIX, ARIZONA 85032 USA
www.bldsolutions.com
(602) 291-4595

© Copyright 2008-10: The Business Leadership Development Corporation


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