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The Invisible Advantage

2021 ඔක්තෝබර් 19

The Invisible Advantage
00:00 / 01:04

As economies try to recover from the pandemic, is there a secret recipe that can steer faster revival and growth? Investments in innovation, brand capital, technology and software, data and intellectual capital are turning out to be the secret ingredients underpinning speedier growth of companies and countries. Although categorized as intangible assets, they are impacting performance...

As economies try to recover from the pandemic, is there a secret recipe that can steer faster revival and growth?

Investments in innovation, brand capital, technology and software, data and intellectual capital are turning out to be the secret ingredients underpinning speedier growth of companies and countries. Although categorized as intangible assets, they are impacting performance in a tangible manner. So, what are intangible assets? Simply put, they are long-term assets of a company that do not have any tangible existence.


In this article, we take a deep dive to understand why intangibles are growing in importance, which intangible assets are likely to be the steering forces of a company’s market value and yet, why firms are reluctant to invest in them.


Let us first take a look at why intangibles are growing in importance?


Investment in intangibles delivers a comparative advantage for business longevity and growth: It is increasingly evident that firms that have a longer business life and are recording higher growth are those that have secured a comparative advantage – one that gives them an edge over competitors.


Intangible assets such as copyrights, goodwill, non-compete agreements, patents are invisible differentiators that enable longer business life, securing a firm’s product, service, idea, any form of creation or design beyond a time period that it takes a competitor to reverse engineer or recreate the same product. This enables revenue optimization for the product created over a period long enough to create economies of scale, lower costs and higher margins. Similarly, companies that invest on intangibles such as innovation, research and development and closely monitor the impact of such investments through rigorous processes are more likely to record faster growth as opposed to companies that do not spend on such innovation or the creation of new products.


For example, Apple and Samsung have grown faster and stayed in the ever-changing mobile phone industry longer than peers as they have continuously invested in smart phone innovation. A McKinsey survey proves that firms that master the deployment of investment in intangibles will be well positioned to develop a comparative advantage, grow faster and outperform peers.

Investment in intangibles also generates a higher market value: 34% of the total worth of the world’s publicly traded companies is made up of undisclosed value, or intangible assets. A study of the market value of the 5 largest global companies (by Market Cap – S&P 500- Apple, Alphabet, Microsoft, Amazon and Facebook) reveals that as much as 84% of the total enterprise value is being generated from intangible assets. This shows that in companies that have made it to the top, intangibles account for a majority of the value, in turn revealing that, higher the value of intangibles, higher the potential growth of the company.

43 years ago, the top 5 leading companies in the world had only 17% of their value being generated by intangibles. The rise to 84% today is confirming how intangibles are playing a crucial role in value generation and business success today. In order to reflect the ability of value generation, executives have also shifted the investment mix to include a higher ratio of intangibles to tangibles in the overall portfolio of assets. In the past 25 years, the share of intangibles in the portfolio of assets have grown by 29%, while the share of tangible assets has declined by 13%.

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