Defining And Constructing Intangible Property
Brand Strategy Insider helps marketing-oriented executives and professionals like you to define and increase brand value. BSI readers know that we regularly answer questions from marketing-oriented executives and professionals everywhere. Today we hear from Ron, a vice president of marketing in Indianapolis, Indiana, who asks these questions about intangibles.
"I'm trying to better understand intangibles and I have several questions. The first question is how are they defined?"
Thanks for your questions Ron. Intangible assets are assets that are used in business operations but have no physical substance. These include brands, customer lists, customer loyalty, patents, copyrights, business processes, specialist knowledge, customer contracts, franchise companies and licenses. These assets are in contrast to property, plant and equipment such as land, buildings, vehicles, equipment, and inventory.
"Why are intangible assets getting so much attention today?"
Unlike forty or fifty years ago when property, plant and equipment made up the vast majority of a company's assets, intangible assets are likely to make up a large part of a company's value today. The work of consulting firms like Ocean Tomo and Brand Finance, as well as accounting firms like PwC, suggests that more than 80% of the value of many large corporations is comprised of intangible assets.
"What is the significance of intangible assets for managers and investors who make up such a high percentage of the company's value?"
First, it's important to understand that most intangibles don't appear on corporate balance sheets. This means that for most companies, much of their value is not reported. Current accounting practices simply do not capture the value of most intangible assets. Such assets are most likely to appear on the balance sheet as a result of an acquisition, when the price paid for the acquisition, which usually reflects the value of an intangible asset, or in the case of an impairment, needs to be justified when the value of an intangible asset such as a brand for any reason loses value. A particularly worrying consequence of such accounting practices is that even if the value of an intangible asset appears on the balance sheet, the value can only decrease; it cannot increase. This makes it very difficult for an investor to judge how well management is managing the intangible assets they control. This also gives managers the freedom to move around as there is no transparency about how well they are managing most of the company's assets. On the other hand, problems arise for conscientious and responsible managers who wish to demonstrate how they can add value to a company through the effective use of intangible assets such as trademarks, copyrighted works, and the like.
"Are there best practices for managing intangible assets?"
It is useful to recognize that intangible assets have always played a greater role in the value of companies than was fully appreciated until recently. There is a considerable amount of knowledge and hands-on experience relating to good management of brands, people and relationships, which is very true. It is easy to ignore this knowledge and practice if its results are not included in financial metrics. This is starting to change with new ISO standards, for example for brand valuation and brand valuation. The critical starting point is realizing that such assets need to be identified, managed, and reported over time.
"What specific suggestions do you have for managers who want to better manage the intangible assets in their company?"
Start by realizing that intangible assets are company owned and managed by a team that is promoted and actively involved by the company's top management and board of directors. It is not possible to manage something invisible. Just as it is difficult to manage inventory when it is out of mind and out of sight, so is intangible assets. An annual inventory of the company's intangible assets must be in place, including a description of who is responsible for management, how their value and changes in that value over time are measured and reported, and active strategies for using those assets. There needs to be a process for making intangible assets visible when management decisions are made.
"Would such visibility change decision-making?"
In some cases, yes; in some cases no; but it would change the questions that are asked. For example, before using a price promotion to increase sales of a strong brand, you need to ask yourself how the focus on discounts will affect the value of the brand in the long term. Discounting might make sense for a brand in decline or on the path to obsolescence, but for a strong brand that is selling premium pricing, short-term sales growth may not be worth the long-term loss of premium pricing power. Similarly, before firing 10% of the workforce, managers could ask what knowledge, what relationships with customers and suppliers, and what efficiency is lost in learning from experience. One reason so many mergers and acquisitions fail to live up to expectations is because they ignore losses in intangible assets associated with seemingly redundant people and operations.
"Are intangible assets likely to grow in importance or have we seen their peak?"
The answers to this question depend on the business. Most businesses always need some property, plant and equipment to capitalize on the intangible asset's value. The COVID pandemic taught us that many physical assets like office space are less important than we thought, but there are still physical assets that are mission-critical in most businesses. On the other hand, more and more of what customers buy and consume is turning to experience attributes, relationships, social interactions and creative content. I still go to a restaurant to buy the food, a material asset, but much of the value I am willing to pay for lies in the creativity of the chef and waiters who know me and me when I arrive greet by name.
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ContriBranding Strategy Insider By: David Stewart, President Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions of Marketing Decisions.
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