Invisible advantage
Power of intangibles in business
Description
Intangible assets, such as brand equity, strategic execution, reputation, and expertise, are increasingly shaping business operations and investor valuations, despite their absence from financial statements. Their growing significance necessitates a shift in business management, focusing more on these intangibles as primary drivers of future growth. Studies indicate that intangibles already account for about a third of a company's market value, a figure likely to rise in the evolving "Intangibles Economy".
Neglecting to actively manage these assets cedes control to the market. Moreover, a competitive edge based on intangibles is challenging for competitors to replicate due to its elusive nature. Companies can rely on these hard-to-imitate assets and competencies, such as innovation, adaptability, dedicated employees, strong leadership, powerful brands, excellent reputation, and efficient systems, as the key sources of value creation have shifted from tangible to intangible.
Table of contents
01Emergence of business non-tangibles.
Over the last 25 years, the significance of intangible assets in business has seen a remarkable increase, now playing a pivotal role in decisions related to investments and initial public offerings (IPOs). This shift has allowed numerous companies to gain a competitive edge that is not easily imitated by competitors. In today's economic environment, those companies that adeptly manage and utilize their intangible assets, which do not appear on traditional financial statements, are often the ones achieving the most success.
For example, General Electric uses its finance arm, GE Capital, to provide better financing options for its equipment than competitors. McDonald’s boosts its growth through the rents it collects from its franchisees, while Pfizer drives innovation with its global research and development efforts, continuously bringing new drugs to market. These strategies, rooted in the effective management of intangible assets, are difficult for competitors to replicate, providing a hidden advantage that is well understood and leveraged by these leading companies, yet remains invisible to others. The importance of intangibles in enhancing a company's performance is more pronounced now than ever before.
Reflecting on the economic changes over the past quarter-century, it's notable that it was only in 1995 that Fortune Magazine started to include service companies alongside manufacturing companies in its ranking of America's 500 largest companies. The success of these service companies hinges entirely on their ability to satisfy customer needs. Previously, competing with an established firm required duplicating its sales and administrative infrastructure. Today, however, a computer network can fulfill these functions. The landscape of economic participation has also evolved; where once government agencies played a gatekeeping role, now virtually anyone can enter the market of their choice, with success determined by market demand rather than bureaucratic decisions. Global trade has expanded significantly, with consumer choices increasingly based on product or service quality rather than origin. This has led to a surge in entrepreneurship and a corresponding growth in industries supporting new business ventures, such as business schools and venture capital.
02Twelve pillars of the non tangible economy
Leadership 1 corporate leadership
In the intangible economy, ceos are pivotal, shaping vision, culture, and leadership to drive growth. They craft distinctive visions, lead executive teams, attract talent, and develop skills. Their symbolic actions set norms, and they prioritize succession planning. Exceptional ceos enhance company value, attracting skilled leaders and ensuring long-term success. As marcus buckingham notes, management quality retains talent, not just brand allure.
Leadership 2 strategy implementation
A robust strategy's success hinges on securing necessary tools and resources for implementation. Imitating another's strategy requires replicating all essential components, a formidable task. In challenging times, refining execution may be more effective than devising new strategies. For mergers or acquisitions, execution is crucial for realizing expected synergies. The global economy's complexities make strategy execution a daunting yet rewarding task, distinguishing firms that excel in execution from their competitors.
Leadership 3 brand value
Modern companies prioritize transparency, disclosing extensive financial and nonfinancial information to foster informed investment, ease customer engagement, and enhance investor confidence. This openness, advocated by figures like former sec chairman arthur levitt, aims to reflect the true value of intangible assets and the factors influencing them in public disclosures.
Relationships 4 brand value
Brands are crucial business intangibles, often yielding high margins and growth. Their value, increasingly tied to customer experience, is not captured on balance sheets, as noted by ex-citicorp ceo walter wriston. A strong brand can enhance a company's operations and attract resources, despite traditional accounting not recognizing their worth.
Relationships 5 company reputation
A firm's reputation, shaped by stakeholders' views, is as vital as tangible assets. Managing it involves evaluating the current status, setting metrics, appointing a manager, making proactive decisions, and communicating effectively. In the digital age, where information spreads rapidly, maintaining a solid reputation is crucial, as it can be quickly tarnished but takes years to build, echoing warren buffett's sentiment.
03Mastering non tangible management
Understanding and leveraging intangible assets is a crucial challenge for businesses today. These assets are not just a passing trend or a fleeting management concept. They are already being utilized by investors to make investment decisions worth millions of dollars. In the future, businesses that excel in identifying, assessing, and enhancing their intangibles are likely to experience significant growth.
Managing intangible assets involves five key steps. First, it's important to identify what your critical intangibles are. Every industry has a few intangibles that generate most of its value. Consult with senior executives, experienced managers, and external consultants to create a prioritized list of the key value drivers for your business. These will be correct if they support your company's competitive advantage.
Second, determine the most suitable metrics for each intangible. Decide what measurements would best indicate progress. These measures could be simple or complex, depending on the intangible. If you find it difficult to come up with consistent metrics, seek ideas from customers, suppliers, or investors. Your measurement ideas don't have to be perfect, just practical, and can be improved over time.
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