The importance of organizational infrastructure (OI).

• Author: Lev, Baruch
• Position: Intangibles

"Intangibles at a Crossroads," (March/April 2002) argued that Phase I of the Intangibles Movement -- creating awareness of the vast magnitude and impact of intangibles, and of the serious information deficiencies and the resulting social harms related to these assets -- was largely successful. The Intangibles Movement, however, is currently at a crossroads, raising the crucial question of "what's next?"

This can be expressed as a series of questions: What should be done to improve the management and disclosure of intangible assets (at the corporate level), upgrade investment and analytical tools applied to the valuation of intangibles-intensive enterprises (capital market level) and measure accurately the value, impact and vulnerabilities of intangibles in national accounts (macro-economy level)?

The first article ended by contending that many intangible assets are inert -- by themselves, they don't create value -- and commoditized (competitors have equal access to them) and, thus, similar to most tangible assets. The major value-creator, and the genuinely true intangible, is organizational infrastructure, which this article will address.

Specifically, it will conceptualize organizational infrastructure, present a methodology for measuring its value, discuss major applications for managers and investors and propose an agenda for Phase II of the Intangibles Movement.

Conceptual Framework

This author's notion of organizational infrastructure derives from macroeconomic growth theory, particularly from the "total factor productivity" (TFP) concept. Growth theory deals with the economic development of nations, with special focus on the drivers of growth. The drivers of economic growth -- measured by GDP change -- can be divided into: increases in factor inputs, such as growth of the labor force and capital investments (property, plant and equipment) and improvements in TFP, the productivity of the factor inputs.

For example, the gross product of U.S. corporate businesses increased in 2000 by $443.2 billion (relative to 1999), while consumption of physical capital increased by $57.9 billion and employee compensation by $289.1 billion. These numbers are in constant (real) dollars, derived from the Bureau of Economic Analysis, National Income and Product Accounts.

How did aggregate spending of $347.0 billion on capital and labor in 2000 increase gross product by $443.2 billion? Where did the $100 billion in value added come from? The answer: total factor productivity -- business processes, organizational designs and incentive systems, enabling the corporate sector to generate an output level substantially higher than invested inputs.

This author defines corporate organizational infrastructure, with required...