|Managing value creation with intangible assets|
The business world went through drastic changes in recent decades. With the development of global markets, greater competitiveness and the dissemination of technology, the economic environment became much more dynamic and unpredictable. It requires equally fast responses from companies if they want to survive.
Within this scenario, the old focus of value creation – based on the productivity of machines and other tangible assets – has been losing ground. Companies no longer gain much of a competitive edge from real assets. As a response to this new paradigm, the market began to assign higher importance to the value generated by intangible capital.
So how should intangible capital be addressed and how should company management adapt to this new reality? First, we should gain a better understanding of what intangible capital is and what makes it so relevant in this new scenario. By definition, intangible assets are any sources of future benefits that do not have a physical structure. They include the value of brands, relationships with customers and suppliers, talent retention, patents, and market expertise. This type of capital is hard to build up (and consequently costly to imitate). This makes it extremely rare, if not unique.
Despite their peculiar characteristics, intangible assets may be sources of high returns – like any other asset – and should therefore be treated as such. This means that it's possible to generate value by investing in intangible assets, so long as the asset's increase in value is greater than the invested amount.
Take reusable razors as an example. Many companies distribute them as free gifts, as a way to consolidate a client base. However, traditional accounting counts such freebies as expenses, with a negative impact on company results. In a traditional compensation model, managers would not feel encouraged to distribute freebies because they would be eating away at their bonuses in the short term.
The practice can generate excellent benefits in the future, however: the company may exchange the devices for a vast network of potential consumers, increasing the sales of razor blades – sold at a high profit margin. If the present value of razor blade sales becomes higher than the freebie distribution expenses, then we have an investment that should be encouraged.
Companies should therefore create a culture that motivates managers to invest in assets with a positive expected net present value. Company management can be much more effective if it uses a management model that treats intangible asset investments not as expenses, but as sources of wealth. Maximization of value should be the target of company compensation plans. All this would increase the business's probability of success.
However, managing these assets is not a simple task. Due to their abstract nature, there is little comparability among them. This makes investment decisions even more difficult and uncertain. The pricing of intangible assets by the market is also highly subjective because it is difficult to project the financial impacts of the benefits they bring. Imagine trying to put a price on the Coca-Cola brand, for instance. What economic results would be gained by a company identical to Coca-Cola in terms of scale, production process, distribution, etc. – but without the Coca-Cola brand?
Even with this type of problem, estimating the value of these assets and including them in company management may help them to face today's challenges. It may even make the difference between success and failure.