COVID-19 has brought unprecedented social, economic and organizational challenges to businesses. Understanding the role played by intangible assets in a business can help with decisions related to reorganization, allocation of capital, and risk management. This article explores how intangible asset strategies may be leveraged upon to increase productivity, improve efficiency in innovation and R&D, and maintain or increase market share.
Intangible Assets drive Revenue Growth – it's not how much you have, it's how you use it
Intangible assets are not of a physical nature. Examples of intangible assets are goodwill, databases, domain names and intellectual property ("IP") such as inventions, trademarks, designs, copyright, and trade secrets. In contrast, tangible assets refer to factories, property, equipment, and inventory. In 1975 intangible assets accounted for about 20% of the market capitalisation of the five largest S&P 500 companies. By 2018, it accounted for around 84%.1 Given the significant value that intangible assets have in a businesses, optimising their usage through intangible asset strategies during an economic downturn should be a priority. Three areas where leveraging on intangible assets can play a pivotal role in a downturn are in improving productivity, increasing efficiency in innovation and R&D, and maintaining or increasing market share.
Growth driver #1 – Improving Productivity
Intangible assets are an important driver of productivity, which in turn can help drive revenue growth.2 Improving productivity during a downturn is key as it positions a business to put organisational efficiencies gained towards use in a recovery. Industries that have a higher proportion of intangible assets as part of their overall assets have been found to also have higher levels of productivity.3
One approach towards improving productivity via intangible assets involves pursuing procurement or the licensing-in of technologies and strategies that make a business' human capital more efficient. This approach is likely to be more time and cost effective than having to developing those assets from scratch. Improving productivity in this manner is most commonly realised in the implementation of digitalisation and automation to a business' workflow processes, for example.
Another class of intangible assets that can improve productivity is that of know-how. Know-is the expertise that a business' human capital has developed or acquired over time. There are various types of know-how within a business such as technical know-how related to the technical aspects of a business' operations, organisational know-how concerning enterprise efficiency, and business process know-how related to its commercial operations. Having substantial know-how has been shown to increase efficiency significantly4, which would be highly beneficial when an upswing comes.
If a business has know-how, the key is to first identify and understand what its know-how comprises of, and the role it plays. If it is not apparent what know-how a business has, then an intangible asset audit can help to systematically identify it. Once know-how has been identified, it can be managed through methods of classification, evaluation and prioritisation. Effective management of know-how can influence changes in information technology, human resources, and business development policies and processes throughout the business. Such changes often herald improvement or growth in the know-how of a business and with it, productivity gains
Growth driver #2 – Efficient Innovation and Research & Development
Another area that should be re-looked during a downturn is a business' approach towards innovation and research and development ("R&D"). Any business can be innovative and engage in R&D, not just technical ones. Creating intangible assets through innovation and R&D during a downturn is critical in preparation of when a recovery comes along. Failure to do so may result in a business being left behind. This is nowhere more evident than in the technology firms that we are familiar with. In 2008, Sony announced a massive cost-reduction exercise including factory closures and job cuts designed to save $2.6 billion, including cutting its R&D expenditure by 12%. While short-term profits improved, Sony now struggles against the likes of new competitors in the areas of gaming consoles (Microsoft), mobile phones (Samsung, Apple) and even televisions (LG, Samsung).5 On the flip side, in 2000 Hewlett-Packard acquired a major rival, increased R&D expenditure by 9% and embarked on a corporate rebranding exercise. Its investment in intangible assets is estimated to have exceeded $25 billion. However, without having a clear focus on how these various initiatives fit together to support its overarching commercial strategy, even when the recession was over, its profitability was lower than that of its rivals.6
The take-away here is that businesses need to prioritise and efficiently allocate their capital towards innovation and R&D activities that are geared towards revenue generation or preservation. To identify those areas, again, having a clear understanding of a business' intangible assets and the role each plays is important. A holistic consideration of a product's IP, for example, can help identify any gaps in IP rights, while analysing the intangible asset data of sectors and industries can reveal open technology spaces or markets where competition may not be as keen. Intangible asset evaluations should also form part of any due diligence behind business acquisitions to verify that the incoming intangible assets will add to or complement existing assets to fuel growth and not unnecessarily increase risk. And of course, looking inwards at a business' own intangible assets can sometimes serve as an objective barometer of which products and/or services should be retired. Cumulatively, these strategies can help a business refocus its limited capital towards innovation and R&D that drives growth.
Growth driver #3 – Market Share Growth & Preservation through Enforcement
The final growth driver is to achieve market share growth or preservation. For businesses with exclusionary IP rights, the enforcement of such rights should continue. Where registered proprietary rights are unavailable or inapplicable, that should prompt a re-examination of the strategy being employed towards market share preservation. It would be of paramount importance to consider whether registered rights should be pursued or if other mechanisms may be more suitable, such as trade secrets and know-how along with management strategies for such assets to be exploited commercially.
Notwithstanding that economic times are tough, vigilant monitoring and firm action should be taken to deal with any infringement or misappropriation of a business' proprietary rights. Studies show that counterfeiting increases during recessions because counterfeiters try to take advantage of the poor economic climate to first, take a chance that enforcement efforts will be scaled back, and second, to cater to demand for counterfeit goods, which seems to increase during difficult economic times.7 Similar considerations apply to civil infringements of a business' proprietary rights as well.
Quick, decisive and public enforcement action is important for three reasons. First, to deter infringers early on from entering the market and eroding market share. Second, such action would also send a message to deter other potential infringers from entering the market thereby not only avoiding further erosion of market share, but also reducing the likelihood of having to take more enforcement action in the future. Third, taking enforcement action also signals to competitors, investors, and consumers that a business has legitimate proprietary intangible assets that confer on it a competitive advantage and that it is able and willing to prevent, disrupt or hinder the market entry of competitors, which can boost overall business confidence and valuations.
Having an Intangible Asset Strategy can help
Each of the above-mentioned growth drivers involves a different set of strategies to be employed. In order to get the maximum benefit, each needs to be implemented such that they work in unison to achieve the business' commercial objectives. Having an organisational – level intangible asset strategy helps to achieve this in three ways.
First, a high – level intangible asset strategy ensures that intangible assets are prioritised and will have visibility to the C – Suite and Directors. Given that intangible assets are a chunk of a business' value, it is only appropriate that management safe-guard, nurture and grow them. It will also be accorded the requisite importance with thought being given at each level on how policies and procedures are to be formulated to take into account the organisation's strategy towards intangible assets eventually becoming part of the organisation's culture.
Second, a unified intangible asset strategy acts as a roadmap to help identify, manage and mitigate the risks associated with intangible assets. For example, while a confidential marketing strategy plays a recognizable role in a business, managing it as an asset requires appropriate steps to be taken to ensure that ownership over the asset vests with the business and that its value is preserved by taking appropriate legal and practical steps to protect its confidentiality – something that often gets overlooked.
Third, a comprehensive intangible asset strategy can help set priorities and improve the efficiency of the allocation of capital by providing a 'big-picture' of the areas where intangible assets add value. Knowing where existing intangible assets add value allows a business to make informed decisions on the deployment of capital to add value through the creation of more intangible assets, or towards strategies to optimise the deployment of existing intangible assets, or both.
Businesses should look towards leveraging on intangible assets to improve productivity, increase or realign innovation and R&D goals, and grow or preserve market share during an economic downturn. Putting a coherent intangible asset strategy in place can help achieve these goals and bring about cost savings and increased revenue growth amidst a challenging economic landscape. Ultimately, the purpose of an intangible asset strategy is to help a business identify and understand its intangible assets, extract maximum commercial benefit from them, and to manage the legal and business risks posed by them – all of which will serve a business well in times of economic uncertainty.
1. Understanding the Strategy, Valuation and Risk of Intangible Assets: https://www.aon.com/thought-leadership/ponemoninstitutereport.jsp
2. Digital Transformation Doesn't Just Increase Revenue, It Can Impact Employee Productivity Too: https://www.forbes.com/sites/jiawertz/2019/09/29/digital-transformation-increase-revenue-impact-employee-productivity/#11fa61ba33cc
3. Demmou, L., I. Stefanescu and A. Arquie (2019), "Productivity growth and finance: The role of intangible assets - a sector level analysis", OECD Economics Department Working Papers, No. 1547, OECD Publishing, Paris, https://doi.org/10.1787/e26cae57-en.
4. New Sources of Growth: Knowledge-based Capital Driving Investment and Productivity in the 21st Century - https://www.oecd.org/sti/50498841.pdf at page 2.
5. Ranjay Gulati, Nitin Nohria, Franz Wohlgezogen, Roaring Out of Recession, Harvard Business Review. https://hbr.org/2010/03/roaring-out-of-recession
6. Ranjay Gulati, Nitin Nohria, Franz Wohlgezogen, Roaring Out of Recession, Harvard Business Review. https://hbr.org/2010/03/roaring-out-of-recession
7. Constantinos-Vasilios Priporas, Alexandros Kapoulas, Counterfeit purchase typologies during an economic crisis. https://www.researchgate.net/publication/271192084_Counterfeit_purchase_typologies_during_an_economic_crisis
Originally published 13 May 2020
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