The way consumers fawn over any new iPhone release is exactly how companies treat their shiny tangible assets.
It’s certainly more impressive to buy a $10 million factory. But think of all the ways those same funds could increase the value of a company if they were invested in R&D, software, brand, relationships or even new skills for staff.
Buying an iPhone or building a new factory aren’t terrible decisions on their own. Perhaps the decision is a result of careful analysis and rational assessment of the risks and rewards. Companies often put plenty of effort into calculating the value of a tangible asset. But that doesn’t mean business leaders understand the opportunity costs of every decision they make.
Money is never infinite (unless you happen to be a central bank) which means that a dollar spent in one place is a dollar that can’t be spent on anything else. There is always a trade-off when making a purchasing decision. This is as true for someone buying an iPhone as it is for corporations building a factory.
The value of intangible assets is tough to appreciate at the best of times precisely because they are out of sight and out of mind. Things like intellectual property (IP) or creating a strong network effect are two highly valuable assets that generally don’t appear on a balance sheet.
But the hardest aspect of explaining intangible assets is that everyone is conditioned to see the cost of things in terms of money (price), not value. Intangible assets often have value far beyond any ability to apply a price to them, which means it can be hard to convince a business leader to take them as seriously as they would, say, building a $10 million factory.
Let’s humanise this opportunity cost problem with the latest iPhone release.
The new iPhone 15 Pro Max is priced at $US799 on the shelf – just for the hardware. But that number is misleading. Factor in that the average cost to run a smartphone is $US1728 per year. Given that people typically hold onto a phone for 2-4 years, this means the real cost of the latest iPhone 15 is actually $US5983 in after-tax income. That’s a lot of money.
The trade-off in the decision to buy an iPhone is not between spending $US5983 or holding onto that money. The real trade-off is between spending $US5983 on the iPhone or spending the same amount on anything else.
What if I snapped my fingers and you got a $US5983-a-year raise? How much would you thank me? That’s high-quality music lessons every single week for your child. Or a math tutor, or a writing tutor, or a batting coach. It’s a personal trainer for yourself. It’s enough to keep two cars running smoothly. It’s two-to-three month’s mortgage repayments for most people.
And here is the lesson for companies…
Think of all the R&D a company might generate with $10 million instead of building a tangible asset like a factory. Think of the enhanced brand value. Think of the upskilled staff churning out productivity.
It’s important to internalise that CEOs are not immune to marketing tricks. Like everyone else, they are attuned to chase status and hunt cool. They are often unable to perceive the actual world as it is. Their brain is easily short-circuited, and their eyes are directly connected to their wallet, just like a consumer tempted into buying the latest iPhone.
For most businesses, choosing to invest in tangible assets comes more from a sense of inertia and a lack of understanding of the kind of assets that are truly creating the underlying value for their company.
Anyone with a chequebook can purchase a tangible asset, so how likely is it that these assets are providing your competitive edge? By over-investing in tangible assets due to inertia, it’s easy to create an opportunity cost that could have a serious impact on the success of a business.
Is it really a wise investment decision to spend that $10 million building a new factory rather than negotiating a licensing deal with partners that already have their own factories?
There are myriad strategies for going to market other than buying more tangible assets. However, seeing those strategies clearly requires thinking differently about intangible assets and looking beyond the balance sheet to see where your value lies.
The release of the iPhone 15 is a good reminder for CEOs to look beyond all the marvellous tangible things they have. Ask yourself whether it really is those tangible assets that are driving revenue growth and differentiating from your competitors. Or are your intangible assets doing all the heavy lifting?
Free 1hr Consultation
Intangible assets are a company’s greatest source of hidden value and hidden risk. Make the valuable visible in your organisation.
Sign-up for a free 1-hour consultation today.