Climbing Mt Success with intangible assets

In the hustle and bustle of the business world, it’s easy to forget that no one permanently lives on top of Mt Success.

This phrase taps into the beautiful wisdom of the Ancient Greeks about “resting on your laurels.” In Greek sports, winners were awarded a wreath as a prize and the aphorism warned about the danger of an athlete basking in the glory of his past victories rather than aiming to win the next race.

Companies can fall into similar traps. They might have seized enormous success with an amazing, world-beating product. But as victory becomes the status quo, innovation inside the winning company wanes and it “rests on its laurels.” We all know what happens next.

Rival companies still hungry for success chip away at their competitor’s weakening market position, spot a gap and start to innovate with renewed vigour. Soon enough, the incumbent is nudged off the summit and a new victor is crowned king of Mt Success. For now…

The lesson is that success is fleeting, even with the best idea. So, the smart companies instead treat the pursuit of commercial success like a game “King of the Hill” where the winner is the player who spends the most minutes at the summit.

In this version of the game, a single success is never enough. The best strategy is to develop and maintain a garden of intangible assets, each with the potential of yielding new ideas at different times that might propel the company back to the top no matter how many times it gets bumped off by rivals.

Think of intangible assets like the crampons, ropes and maps used by corporate climbers as they ascend Mt Success. The higher the quality of these tools, the more likely it is that the company will reach the top. Intangible assets offer options and new ways of thinking. It’s really no exaggeration to say that commercial success is impossible without them.

Intangible assets are so brimming with potential that they now constitute more than 90% of the value of most modern companies. This ratio is widening each year as companies in all sectors get more sophisticated and global supply chains become more complex. In the past, tangible assets (generally thought of as only property, plant and equipment) captured most of a company’s core value. But that story has changed, as displayed in the below graph from the S&P500.

The most colourful definition of an intangible asset is anything valuable owned by a company that can’t be dropped on your foot.

A more sterile definition comes from the International Financial Reporting Standards (IFRS), IAS 38, which describes an intangible asset as any “non-monetary asset without physical substance and identifiable.”

EverEdge defines the types of intangible assets differently and splits them into 12 neat boxes, including: relationships, confidential information, industry expertise, design, approvals and certifications, plant varieties, content, inventions, brand, software, network effect and data. There are many subcategories of intangible assets, but these boxes cover the broad strokes.

Some companies like Apple, Microsoft or Tesla know all about their intangible assets and how to use them. Their deep knowledge of intangible assets means when they regularly climb to the summit, they end up pitching tents since they tend to stay at the top for a while.

But most companies – sometimes headed by people with decades of business experience who should know better – still struggle to “see” their intangible assets, let alone understand how to maintain, protect and deploy them for maximum value. So, when these companies reach Mt Success, they tend to count their lucky stars rather than praise their intangible tools.

It’s little wonder that most companies end up being the corporate equivalent of “one-hit wonders,” muddling along for years until they accidentally hit on commercial success (if at all). What Apple and Tesla do each week is not magic or even rocket science. The ability of those companies to regularly scale Mt Success comes down to understanding their intangible assets.

Why do most companies have such a tough time doing this?

The simplest answer (which also happens to be correct) is that accounting standards make it difficult for companies to identify and capture the value of their intangible assets in financial statements. Unfortunately, by looking only at historical costs and future cash flow accountants miss the intangible secret sauce that makes up the bulk of the value of modern companies.

This lack of bookkeeping visibility, coupled with the general lack of any public disclosures when measuring intangible assets, is starting to draw the attention of regulatory bodies like the US Financial Accounting Standards Board (FASB) that hope to encourage more companies to shed light on their intangible assets.

Indeed, the FASB recently asked its members if it should require intangible assets to appear on balance sheets and the overall response was positive. However, the study was removed from the research agenda after the FASB cited the potential for surprise write-downs of intangible assets due to inaccurate measurements. This bizarre decision to backtrack probably means accounting standards are unlikely to change any time soon, which is a huge shame.

Until the accounting world catches up with the realities of modern business, individuals must self-educate about intangible assets if they hope to outclimb their competition.

Adopting a business strategy that focuses on building up and deploying a company’s intangible assets will do more to insulate it from disruption and help it attract (and retain) top talent than almost any other measure.

Ultimately, thinking correctly about intangible assets is the only way to stay on top of Mt Success longer than one’s rivals and win the game of King of the Hill.