Building an export business is full of challenges: exchange rates, import regulations, foreign cultures, remote staff and endless international flights. The rewards of exporting are high, but so are the costs and risks.
A key way to tip the export odds in your favour is to have “unfair advantage” – a unique feature of your product or service that cannot be easily copied and which leads customers to prefer your product over others, which in turn translates into increased sales and/or margin. Typically this “unfair advantage” is not derived from physical business assets such as your real estate, equipment or vehicles but intangible assets such as product design, manufacturing trade secrets, innovative product functionality, great branding, unique software code, efficient systems and processes, patented technology or sometimes a combination of all these things.
That intangible assets are a key driver of export success should not be surprising: today intangible assets make up over 85% of the value of most companies and are the primary drivers of company performance. The unfair advantage that intangible assets can deliver are often the difference between increased offshore margins and market share and watching as competitors copy your products with impunity.
Despite their impact intangible assets are often poorly understood by many companies. First, standard accounting convention means intangible assets typically do not make the balance sheet and their contribution to financial performance often isn’t called out in the P&L. As management guru Peter Drucker notes “what gets measured, gets managed” – much management time tends to focus on fixed assets (which are measured and managed very carefully) and disproportionately little time is spent managing more important (yet less easily measured) intangible assets. Second, historically “intangible assets” were seen very narrowly as legal rights and a species of “intellectual property”. Living within the legal function of the business there tended to be a lot of focus on filing patents and trademarks. Advice around intangible asset issues was often theoretical, legally orientated and expensive rather than the practical, common sense, commercial approach exporters typically need.
So to help exporters understand intangible assets we have prepared a list of the “Top 5 Myths Every Export Orientated CEO Should Know About Intangible Assets”. A kind of ‘go to’ resource that does not give you every answer but helps you ask the right questions and avoid pitfalls.
Myth 1: ‘Intangible assets = patents or trademarks
If you ask an accountant, intangible assets are often lumped under the general term “goodwill” – there is little attempt to tease out what these assets are and their impact (despite, on the other hand the huge time spent tracking fixed assets such as desk, chairs and lap tops). Likewise if you ask a lawyer the focus will typically be on patents or trademarks. Neither response reflects business reality today. There are in fact many different kinds of intangible assets, including ‘soft’ intangible assets such as confidential information, data, supplier relationships, unregistered trademarks, content, copyright and regulatory approval rights, as well as ‘hard’ intangible assets such as patents and trademarks. All have the potential to provide an unfair advantage. Interestingly, for most companies the overwhelming volume and value of their intangible assets is not in hard patent and trademark rights but in soft intangible assets such as confidential information and manufacturing know how. This is important because firstly, these soft intangible assets are free (they do not need to be registered in the way a patent is for example) and secondly the strategy used to protect and exploit them, especially internationally, is completely different from the approach used for hard intangible assets.
Myth 2: ‘I don’t have any intangible assets’
Many companies erroneously believe they don’t have any intangible assets. This is unlikely: most companies have many intangible assets they just do not recognise them. As stated above, today 85% + of most companies’ value is actually in intangible assets. Your customer list, your bill of materials, your brand, your production expertise – all of these are intangible assets. If you don’t believe they are important try not using them for a week and see how hard it is create revenue! The first step in leveraging your intangible assets is to understand that you have them. From there you can identify the kinds of intangibles you have, what the best options are to protect them and how you can make money from them.
Myth 3: ‘Intangible assets aren’t important’
Some management teams believe intangible assets are too vague to identify and intellectual property is ‘impossible’ to enforce and the only solution is to “run as fast as you can”. Being first to the punch bowl can be a good strategy but in the long run a strategy of constant, rapid product iteration to offset a lack of intangible assets is simply unsustainable. It requires substantial, continuous injections of resource just to stay ahead. In a global economy new competitors continually spring up and you simply cannot outrun everyone. Further, running fast does not help when a large competitor shuts you out of the market using their intangible assets or duplicates your product at half the price. Intangible assets can be useful in many different ways and open new opportunities – it’s critical to understand how to use them.
Myth 4: ‘Intangible assets can wait for later’
Intangible assets are seldom a burning issue and are all too easy to put off. They only get to the top of the agenda for most senior management teams when something goes wrong: they discover a distributor, not them, owns a core intangible asset or their latest breakthrough technology actually broke through 10 years ago and they are now infringing someone else’s rights. The problem is amplified by the fact that legal remedies for intangible asset issues tend to be extraordinarily expensive if things go wrong. It is a business area where you want to be building fences at the top of the cliff not picking up pieces at the bottom. It is important to note that boards and management teams can be directly liable to shareholders for failing to manage their intangible assets and risk effectively.
Myth 5: ‘If I’ve got a patent, I’m safe’
Many companies erroneously believe that having their own patent means they are ‘safe’. That is they think that:
people cannot use their patented products
they cannot be sued for patent infringement
they can enter an export market unchallenged by competition.
Unfortunately this is incorrect on all fronts. A useful analogy: a patent is a sword not a shield. Firstly, to use your patent (your sword) you have to enforce it (hit someone with it). Simply having a patent (sword) in your drawer has zero effect. Secondly, you can still be sued by someone for patent infringement even if you have your own patent – the patent functions as a sword (to attack) not a shield (to defend). Merely having patents means little, it is what you do with them, how you use them in concert with other intangible assets that really counts.
To summarise, intangible assets are a key success factor for exporting businesses. They are not a legal issue and should not be seen as a narrow legal issue. Intangible asset strategy is a core business function and needs to be driven by the Board, CEO and senior management team. To achieve this companies need good, clear, common sense advice around their intangible assets. While patents and trademarks may be a portion of your company’s intangible assets, for obvious reasons the business of your intangible asset strategy should not be set by the legal provider filing your patents or trademarks.
Like most things in business the rules are quite simple: intangible assets are actually are a business tool. If used appropriately they can be enormously powerful and valuable. If poorly identified or used incorrectly due to lack of experience or poor advice, they can lead to major damage, eye watering cost and frequently export failure. The key takeaway: if you are in the business of employing smart people or creating smart products to export you are in the business of creating intangible assets, which means they must be understood and managed correctly.