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Managing Value in an intangible environment

Did you know that a company like GE which is so capital intensive has a brand value of nearly $47 billion? Did you know that TATA brand value is $5.5 billion making it the 57th most valuable brand in the world? P&G recently acquired Gillette for a whopping $57 billion, out of which 45% was paid for Gillette’s brands alone. The total value of the top ten global brands is $390 billion, three times the GDP of Thailand.

If you acquired a business before the early eighties, chances are you would have paid as much as 75% for the balance sheet. Today only a fifth is paid for the same assets. So what are you paying the balance for? If you can't explain where 80% of your business' value originates, someone is going to come along pretty soon and eat your lunch.

If you think it is just pure common accounting sense: what would happen to the cash flows of any of these three businesses, if just the name were to be removed. There are lots of intangibles that have the potential to create value, including intellectual property, business processes, specialized training, skilled employees, customer intimacy, corporate culture, and many others that don't show up on most balance sheets.

Businesses and investors have to figure out how to identify all of the assets that contribute to the creation of value; how to measure them to understand the nature of the value they create; and how to improve their value to measurably grow the bottom line.

The prevalent belief that the growing pressure on marketing performance is all about accountability is dangerous for marketers. Accountability is a major concern, but simply embracing financial terms like "customer lifetime value" and "marketing return on investment (ROI)" won't cut it. Businesses are under pressure not only to improve efficiency, but to model, measure, and maximize the intangibles that create real market value.

Do accounting standards recognise these assets?

One of the fundamental stumbling blocks to better value management has been the recognition of these as business assets by the accounting principles in vogue. The International Financial Reporting System (IFRS) will bring some consistency in the overall requirement to value the brands of the companies listed. This includes valuing all brands bought and sold and a requirement for an ongoing annual re­assessment of the value of acquired brands known as an impairment review where the brand does not have a specified useful economic life.

IFRS as implemented in Europe mandates all listed companies to report the value of all acquired intangible assets, such as brands, on their balance sheets. Complying with this mandatory legislation, the IFRS will have significant long term strategic implications for brands and those responsible for them, so it is essential that the CEO, CFO and marketers get involved in the brand valuation process from the outset.

The CEO and CFO would want to be in charge of the company’s most valuable asset as well as the allocation of resource that fuels it. Previously, intangible assets were lumped together on the balance sheet under goodwill. This goodwill is now being separated out into measurable and identifiable intangible assets, such as brands, copyrights and patents.

One of the primary benefits of applying the financial accounting standards for brands is the opportunity to construct a value contribution model for on­going brand management. It is indeed possible today to identify the value contribution of a brand by geography, demographics, product line, retail formats etc. This would be an invaluable tool in the hands of any management that wants to influence and monitor value creation by design.

The ‘globalisation’ of Indian Brands

Recent trends show the increasing number of Indian companies already flexing their muscles and investing overseas from deals like Corus, General Chemicals, and Jaguar­-Landrover. It doesn’t take a PhD in finance to figure out what assets these companies were bought for. If indeed these companies’ former owners were paid such large amounts (borrowed) for their intangibles, it stands to reason that shareholders would like to know how these assets are being managed for value by their managements. Otherwise it might end up like the businessman who bought his million dollar beach house for the sunsets, but stayed indoors most of the time.

The CEO and Brand Value Creation

If the board’s mandate to the CEO is to create value, it would be ironical if there were no means for him to know where value resides. Enlightened firms like Apple, BMW, Nokia, McDonald’s and Disney have clear mandates for the CEO to manage and protect their most valuable assets.

As such, in these companies, the CEO is actually the CBO or the Chief Brand Officer. Think of the number of legendary brand names which are so closely linked to the leadership of the firm. Only yesterday, the stocks of Apple fell to USD 146 on rumours that Steve Jobs may have had a relapse of his pancreatic cancer.

In the end the difference between performers and the rest would be just three

  1. A management that can identify what creates value in their firms

  2. An organisation structure that is built around these assets

  3. A strong leadership that can drive these assets

Find these three and you will find real and rapid value creation.