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a. DEFINING INTANGIBLES
It is widely acknowledge that nowadays non-physical assets remarkably
contribute to increase the competitiveness and the value of firms.
The definitions provided by the main standard setting bodies in the world
usually characterize intangible assets as non-physical and non-monetary
sources of probable future economic profits accruing to the firm as a result of
past events or transactions. Intangibles are usually defined as identifiable
(separable) non-monetary sources of probable future economic benefits to an
entity that lack physical substance, have been acquired or developed
internally from identifiable costs, have a finite life, have market value apart
from the entity, and are owned or controlled by the firm as a result of past
transactions or events.
However, definitions elaborated for accounting purposes may appear
restrictive. When an enterprise has insufficient control over the expected
future economic benefits arising from a team of skilled staff and from
training, or when intangibles are not clearly identifiable, there might be
serious problems in finding these to meet the definition purposed.
In some cases, intangibles are identified with goodwill and considered as the
excess cost of an acquired company over the value of its net tangible assets
(White et al., 1994). In the UK, the Accounting Standards Board has embraced
this idea considering that all intangibles should be understood as part of
goodwill, as it is unlikely that they can be sold without selling the whole
business.
In literature, broader definitions, especially designed for management
purposes, have been suggested. Intangibles have been defined as resources
that are not visible in the balance sheet, but that add value to the enterprise"
(Edvinsson, 1997), or as "non-physical sources of value (claims to future
benefits), generated by innovation (discovery), unique organizational designs,
or human resources practices" (Lev, 2001; p.13). As a working definition, the
High Level Expert Group (Eustace, 2000; p.31) took intangibles to be Nonmaterial factors that contribute to enterprise performance in the production
of goods or the provision of services, or that are expected to generate future
economic benefits to the entities or individuals that control their
deployment.
One of the most recent and all-encompassing definitions is given by Baruch
Lev: An intangible asset, like any other asset (a machine or a rental property),
is a source of future benefits that lacks the physical embodiment (Baruch Lev,
2005).
The Coca-Cola brand name is an example of a highly valuable intangible
asset that enables owners to generate substantial revenues and profits over
extended periods.
b. TAXONOMY OF INTANGIBLE ASSETS
Aware of the importance of intangible assets, the accounting profession
has also proposed a four part classification of intangible assets:
brands, intellectual property, publishing rights and licenses.
c. MEASUREMENT ISSUES
When do intangible assets need to be valued?
Besides the important issue of stock market valuation, there are several
principal business circumstances in which intangible value needs to be
measured:
(1) A company sale, merger or acquisition: The acquiring company will
appropriate the physical assets or the purchased firm, but it also needs to
determine what the injection of new knowledge is worth. Accounting
measures do not coincide with economic or market-based values (Reilly,
1995). Many mergers and acquisitions are justified on the grounds of
combinatorial synergy between the knowledge base of the two companies.
However, there could also be combinatorial incompatibilities, knowledge
transfer costs over many years, and cultural compatibility problems between
the merging organizations.
(2) Sale, purchase or licensing of separable assets such as brands,
patents, copyrights, databases or technology. By `separable assets' is meant
transferable knowledge, intellectual property or market rights, and partially
codified knowledge that can be sold or licensed to another firm. Here, only a
portion of the intangible assets of a company are spun off to another firm by
a transfer of rights and/or by training the other firm in the use of the
transferred knowledge. The question is how much should the company
licensing or acquiring these assets pay?
The result is a company ROA that is then compared with its industry average.
The difference is multiplied by the company's average tangible assets to
calculate an average annual earning from the Intangibles. Dividing the aboveaverage earnings by the company's average cost of capital or an interest
rate, one can derive an estimate of the value of its intangible assets. One
example is provided by the Economic Value Added (EVA - It is calculated by
adjusting the firms disclosed profit with charges related to intangibles.
Changes in EVA provide an indication of whether the firms intellectual capital
is productive or not) (Stewart 1997).
In light of the shortcomings of cost-based and transaction-based
valuation approaches, accountants recommends another approach, the
Discounted Cash Flow (DCF) method which determines the economic value of
an asset by looking at its cash generating potential.
Both the four part classification mentioned earlier and DCF approach were
endorsed by the International Accounting Standards Committee (IASC) in its
1994 Draft Statement of Principles on Intangible Assets [IASC, 1994].
This by no means implies that the consensus on intangible assets has been
achieved. The DCF method is far from universally accepted.
Thus the issue of accounting treatment of intangible assets remains largely
unsettled.
2. Demand perspective: intangible artifacts
Intangible artifacts include different forms of information and communication,
cultural elements, audio-visual media, entertainment and leisure, finance etc.
As it is well known, goods are essentially entities of economic value over
which ownership rights can be established and that can be exchanged. As
goods are distinct entities, which are separate from their producers or
owners, the production and trading of goods are two different activities,
which can be organized separately and carried out at different locations and
times. Complex channels of distribution can be developed with goods
changing hands several times as they pass from their original producers to
their eventual users or consumers. Goods can be consumed or used long
after they are produced at locations which are remote from their place of
production.
Intangible artifacts share the economic characteristics of goods just
described.
They are entities over which ownership rights can be established and which
are of economic value to their owner. They are also intangible because they
have no physical dimensions or co-ordinates in space. They are the originals
created by authors, composers, scientists, architects, engineers, designers,
software writers, film studios, orchestras, and so on. These originals are
intangibles that have no physical dimensions or spatial co-ordinates of their
own and have to be recorded and stored on physical media such as paper,
films, tapes, disks etc.
The producer of the original is their first owner, but the ownership may be
transferred to another economic unit. The ownership right is often legally
The type of support can differ, depending on the nature of the intangible content:
objects (disks, tapes, CDs, paper etc), environment (location, resort, atmosphere),
people, mixed.
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The impact of the intangible economy is pervasive and affects all sectors and
activities.
The dematerialization logic is unsettling to the extent that it runs against
some of the key tenets of the conventional logic of economics.
The three fundamental features of dematerialization
abundance, interpenetration and indeterminacy.
logic
are:
A. Abundance
Intangible economy is structurally abundant.
Physical goods are subject to physical decay and their consumption marks
the beginning of the end of their economic life. Intangible artifacts, on the
other hand, are not only extremely cheap to replicate but furthermore are not
eliminated through consumption.
The intangible economy puts on top of the abundance of production the
abundance of accumulation.
The lifecycle of popular intangible artifacts is considerably longer than that
of material goods: we will forever read Balzac books, listen to Bach music or
watch Bergman movies.
Financial systems generate too many transactions, Hollywood, too much
entertainment, Internet, too much information. The gap between supply and
demand of intangible artifacts is so huge that it has created an information
overload, also called infoglut: the inability to absorb the torrential and
continuously swelling flood of data, images, messages and transactions
(Tetzeli, 1994). Moreover, the overload is self-perpetuating: to navigate
through it we need catalogues, indexes, documentation, whose very
proliferation calls for more cross-references, hypertext links and so on.
Efficient infoglut management requires more rather than less information.
Information about information is a growing business.
Abundance confronts consumers with a dilemma. On the one hand, they
want to take advantage of the increased choice of products and artifacts. On
the other hand, they seek to minimize the cost of search.
In response to the first objective, new modes of consumption have emerged:
zapping, surfing or browsing. They are characterized by a short attention
span, latency, high frequency of switching and capriciousness. They blur the
distinction between consumption and non-consumption, rendering pricing
problems even more intractable.
The expanded range of output makes consumer choice more difficult, by
continuously raising the cost of acquiring information about the output. To
minimize this cost, the choice is increasingly determined by criteria other
than product characteristics such as brand familiarity or mimicking and
fashion (Bikchandani and al., 1993; Veblen, 1899).
Brand and fashion-driven demand force suppliers to continuously renew
their offerings and to actively manage their product portfolio. Product cycle is
becoming shorter. Obsolescence is no longer an external constraint, it
becomes an instrumental variable. In certain areas, such as personal
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B. INTERPENETRATION
The intangible economy undermines traditional frontiers and distinctions.
Sectoral boundaries are crumbling: previously separate activities of
telecommunication, informatics, electronics and audio-visual entertainment
are now overlapping.
Time-honored distinctions between work and leisure, home and work-place,
intermediate good and final output, consumer and producer, product and
service, become blurred. Not only are the boundaries porous and overlaying,
they are unstable.
The interpenetration profoundly changes the nature of the firm and its
relationships with the environment. Internal links, between firm and its
employees, become weaker; external links, between firms and its suppliers,
become stronger. While employees are told to work at home, suppliers are
invited to work on premises. Functions traditionally considered as central to
the very existence of the firm are now subcontracted or outsourced. This
leads to the advent of the virtual corporation (Davidow and Malone,
1992]).
Nike, leader in sport shoes, does not manufacture any shoes. Nor
does Dell, a leading supplier of computers, own any production
plant. In the semiconductor industry, many leading firms are fable
less concentrating on chip design and subcontracting their
production (Rapaport and Halevi, 1991). In computer services,
outsourcing is one of the highest growth sectors.
Dematerialization logic modifies the market power balance and the value
chain structure. In the industrial economy, the central position in the
value chain was that of final product assembly, while the position of
subcontractor was subordinate.
Despite the fact that Michelin contributed more to the development of the
automobile, by facilitating road travel with maps, signs and guides, than
Renault or Citroen, the latter gained greater market power: few people ever
buy their cars in function of the brand of its tires. In the intangible economy,
a subcontractor often assumes a dominant position. Thus, in personal
computers, Intel and Microsoft, are in a considerably stronger position, and
are more profitable, than IBM or Compaq, which control final assembly. Their
dominance is due to their ability to establish intellectual property rights over
key product components, in this instance microprocessor architecture and
operating system software.
These changes in the value chain structure reflect a fundamental trend: the
weight of the value chain is moving closer to the consumer.
This trend has led to the emergence of power retailers such as Wal-Mart in
the US, Marks and Spencer in the UK, Galleries Lafayette in France or Ikea in
Sweden. They decide which products are put on the scarce real estate of
store shelves. They also set prices and become increasingly involved in
product design. One visible sign of their increasing power is the development
of own-label brands. According to Boston Consulting Group estimates (Reid,
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1995), own-label brands represent close to 30% of total grocery sales in the
UK, 25% in Germany, over 20% in France, and their share is growing.
C. INDETERMINACY
The dematerialization logic is not deterministic. It does not point to a single
optimal trajectory. It actually widens the range of choices and alternatives.
Instability and volatility which govern the demand for intangibles become
pervasive and affect all aspects of the economy, national competitiveness,
business hierarchies and market structures, prompting frequent and massive
reversals of judgments and opinions.
The hierarchy upheaval is even more dramatic in business. Out of 500
American corporations that comprised the Fortune 500 ranking in 1995, 40%
have disappeared by now.
Market dominance can be achieved with unprecedented speed and lost with
equal if not greater rapidity, particularly in fast growing sectors such as
telecommunications and computers.
The intangible economy is molded by contradictory cross-currents:
globalization and localization, concentration and fragmentation, vertical
integration and horizontal competition. This is what John Naisbitt refers to as
a Global Paradox (Naisbitt, 1994; Alesina and Spolane, 1995).
Contradictory crosscurrents are the strongest in the business area. On the
one hand, the competition has never been keener; the fight for market share
and shelf space, more brutal; the rivalry between firms, more intense. At the
same time, alliances proliferate in all sectors and all areas and management
theorists extol the virtues of co-operation and sharing (Badaracco, 1991,
Nalebuff and Brandenburger, 1996). This coexistence of competition and
co-operation has prompted Ray Noorda, the founder of Novell, the
leading provider of networking software, to coin a new term - the
coopetition.
At the core of the intangible economy, contradictory forces are at work:
economies of scale and increasing returns, on the one hand, value shift to the
consumer and market upheaval, on the other hand. These forces will continue
to coexist and to interact, thus maintaining indeterminacy.
Contrary to the industrial economy, economies of scale in the
production of intangible artifacts are limited: adding twice as many
programmers to a software development project is unlikely to cut in
half its completion time or cost, it may actually double it. However,
economies of scale in distribution can be significant, due to a
combination of high fixed costs of creating the distribution
infrastructure and low variable costs of using it. They are a major
vector in the downstream value chain shift. They also constitute the
main rationale for the wave of mergers in sectors such as banking,
retailing and media, whose prime objective is to create large and
ubiquitous distribution networks (Wysocki, 1995).
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At the firm level, such changes have meant new governance forms, new
organization, indeed a change in the very nature of the firm. The vertically
integrated firm may no longer be the best form of governance of the
production process.
In order to produce products with high knowledge content, knowledge
management within the firm becomes crucial. In such a context, the aims of
knowledge management are twofold: (i) collect and process as much
knowledge as possible on markets, technologies, etc, and (ii) create
knowledge. For both objectives the organization as network is more
effective.
The network exists not only within the firm (decentralization and flatter
hierarchies), but also between the firm and its environment, since networks
are created for production (with suppliers) and also for innovation.
The network that is external to the firm concerns relationships with suppliers
(see the vast literature on suppliers networks in the car industry, such as
Asanuma, 1989, Chanaron and Lung, 1995, Boyer et al., 1998) but also
relationships with competitors in order to jointly perform R&D activities or
even to develop products.
Concerning supply networks, the single firm no longer carries out all activities
of the production process within its boundaries, but rather outsources some
of its activities to external firms, at various stages of the production process.
As a result, the overall production organization is realized by a network of
firms.
In fact, outsourcing appears as a strategy complementary to internal
decentralization and is well fitted to the objectives of management and
creation of knowledge for product differentiation.
Each firm in the network specializes in a part of the production process and
develops high competence and a mastery of the knowledge relevant to that
particular activity, while the membership of the network ensures the coordination of the various activities.
The large, vertically integrated firm primarily relied on the ownership of
highly specialized assets (assembly lines, machinery, etc.) with human
capital tied to these assets, in order to gain market power and create value.
The ownership of such assets was the major source of power in the
corporation; the boundaries of the firm were clearly defined by the ownership
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of such assets; as a result, the key issue in the firm was the separation of
ownership and control and economists focused their analysis of the firm on
this issue. As Chandler (1990) argued, the primary advantage of the modern
business enterprise was its scale and scope.
In the new firm, power is distributed differently than in the vertically
integrated firm. In the past, the ownership of the firms valuable resources
was concentrated in the hands of the shareholders, the owners of the
company. The current situation is different: the valuable resources are
distributed among different actors: employees, who bring their human
capital; suppliers, with innovative or other capacities; and so on.
In these conditions, the determinants of market power are no longer low
costs and firm size, but rather the ability to manage networks: this is the case
of Nokia, Microsoft, Gucci, LVMH and a number of automobile manufacturers
The relevant unit of analysis in the study of firms competitiveness should
therefore be the network of which the firm is part, rather than the
single firm. The objective of the firm is to manage and create knowledge in
a network, in order to differentiate and frequently renew products and gain
the loyalty of customers. The ability to organize and control a network
therefore appears as a key determinant of competitiveness.
The firm continues to be the basic repository of property rights, strategic
management and accumulation of capital. However, business practice is
increasingly a function of ad hoc networks whose expertise is solicited for the
achievement of specific business project goals. In terms of its internal
organizational structure, the network enterprise is characterized by several
main trends:
- its organization is structured around process, not task;
- it has a flat organizational hierarchy;
- the work process is organized on the basis of teams;
- customer satisfaction is the primary measure of business performance;
- the structure of reward is based on team performance
- the maximization of contacts with suppliers and customers is an integral
part of the business process
- information and continuous training of employees at all levels are
considered critical to business success
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