A marketers explanation of the difference between an ‘Intangible Asset’ and ‘Goodwill’

A marketers explanation of the difference between an ‘Intangible Asset’ and ‘Goodwill’

Apr 30, 2018 | Change, Governance, Strategy

When you look at a balance sheet, the intangible elements of it are either the outcome of ‘boilerplate’ accounting standards that bear little resemblance to reality, or are the function of a management narrative. Neither is of much use, and both can be destructive.

For example: under the accounting standards, intangible assets are listed on a company’s balance sheet only if they are acquired, and therefore have an identifiable cost, and usually lifespan that can be amortised. Assets developed internally have no place on a balance sheet.

Of course, neither goodwill or intangible assets as recorded have little ’cause and effect’ connection with the share market valuation, which is all about future cash flows.

The Coca Cola logo is generally ‘valued’ in the billions, but does not appear in the balance sheet because it was built internally, rather than acquired. Were a company to acquire Coca Cola, there would then be a value that could be pinned to the logo, which would then appear on their balance sheet. The caveat is that there are mechanisms to place a value on an intangible asset that can be recorded, usually involving independent valuations, but these valuations come with a grain of salt.

A further example. When developing a new product, the outcomes of that effort may be seen as an intangible asset, but it appears nowhere except the P&L, as development expenses. Assume the product is a pharmaceutical product, years in the development, and very expensive, this is a drain on cash flow in the hope that there will be a pay-off. Prior to commercial launch, it has been patented, the efficacy proven, then the patent becomes a tangible asset, as a dollar value can be attached, and the patent is tradeable. The brand name of the new product will become a new intangible asset, not reflected anywhere beyond an implied connection to the value of the patent. Over time if the product is a market success, the value of the patent will increase to reflect the future cash flows that will result from ownership, to a peak, after which the cash flows will be subjected to competition from generic products that will become available as the patent period runs out, so the value is reduced. The brand name has no value in the books, until it is sold, perhaps along with the patent,

The key distinction between goodwill and intangible assets is that the goodwill has been purchased, so has a market defined value. Google paid $12.5 Billion in 2011 for Motorola Mobility, entirely  for the patent library they owned. At the time, Motorola was close to broke, their products which had led the mobile phone market had suddenly become irrelevant when they missed the smart phone revolution. The patents were transferred to Google, who then sold the remaining  hardware business to Lenovo for $3 billion, without the key software patents. On paper, Google took a $8.5 billion loss, but retained the patent library and intellectual capital associated with the Motorola development labs. This gave them greater leverage with the users of Android mobile software, predominantly Samsung, and protection against the relentless patent wars with Apple. A great deal.

Lenovo would have an item on their balance sheet that values their purchases from Google, but there is nothing on Googles balance sheet beyond the  ‘loss’ they incurred in the transaction, which fails to reflect the future value they will derive from the ownership of the patent library.

However, there is a sea change going on. According to research company Ocean Tomo, the proportion of US Fortune 500 companies stock market valuations represented by intangible assets has gone from 17% in 1975 to 87% in 2015.

The lesson here is that the world has changed, so called ‘soft’ assets are now more valuable than the physical assets that accounting systems were designed to track.  Focussing effort on building those soft assets will pay long term dividends, which cannot be readily accounted for in the monthly financial reports.

For most of my client base, the notion of intangible assets is far-fetched, until they come to valuing their business, when a primary asset becomes the relationship they have with their major customers, and how ‘sticky’ they might be seen post a sales transaction. It is this ‘stickiness’ that is a primary driver for the acquiring company to keep the key personnel employed on a pay-out contract based on a period of time and key KPI’s, to better manage the smooth transfer of the relationships.

Header from http://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study/

Is marketing’s greatest failure in the boardroom?

Is marketing’s greatest failure in the boardroom?

Apr 23, 2018 | Change, Governance, Leadership

There have been libraries written about strategy, and particularly marketing strategy. There are now multitudes of tools and templates available to develop and implement, but the gap between the development and successful implementation of marketing strategy is huge, and hard to navigate.

Marketing is a functional silo on an organisation chart, as is Sales, Operations, Finance, HR, but unlike the others, marketing deals with unknowns, the future, whereas all the other functions deal with the past, or what is immediately in front of them.

Marketing is about the future, long term commercial sustainability, and its effectiveness is really hard to measure, other than in hindsight. There are lots of measures for things that have happened, which are the result of often many combinations of actions taken some time ago, so the measures are unable to change anything, just give insights to what worked and what did not.

As the senior marketing person in a very large business 30 years ago, I found myself often talking about advertising, segmentation, positioning, graphic design, and all the rest, around the board table, which either put others to sleep, or elicited opinions, usually uninformed, about the detail. However, when I talked revenue I had their attention.

Marketing is all about revenue, particularly future revenue. The other stuff is the paddling under the surface that enables the generation of the revenue, but the real measure of marketing effectiveness is revenue and margins over time.

In every business I have ever had anything to do with, marketing expenditure is treated as an item in the P&L. By definition, items in the P&L are expenses or past sales revenue. This is inconsistent with the notion of marketing being about building the foundations of future revenue.

The closest analogy is a piece of capital equipment, they are always purchased to fill one of two roles, sometimes both:

  • Increase the volumes available too be sold,
  • Increase the productivity of the processes.

Those purchases are recorded in the journals, posted to the appropriate ledger account and reported in the cash flow statements, and the balance sheet, not the P&L. The greater irony is that capital items are depreciating assets, whereas marketing  investments, when done well are appreciating assets, unrecorded anywhere except the P&L as an expense until the business is sold, when the accountants start talking about ‘Goodwill’ being the difference between the realisable value of the physical assets, and the liabilities on the books.

There is a structural paradox here. We treat a potentially appreciating asset differently to one that can only depreciate, just because it is hard to measure.

This challenge of measurement is the biggest one marketing people have to hurdle. The turnover of marketers in senior roles is the fastest amongst the functional heads in large corporations because we generally do not recognise the essential long term business building nature of marketing investments. We treat it as an expense to be cut at the slightest cloud on the profitability horizon, and the marketing people with it.

One of the challenges here is that to achieve these long term outcomes, marketing requires the co-operation and  collaboration of all the other functions, without the organisational authority to direct. The CMO has to be a leader across functions. He/she has to build the respect and co-operation of other functional leaders, often at odds with their short term function specific performance measures.

25 years ago, I and my marketing team, failed to convince the board of the then Dairy Farmers Co-Operative to invest the required capital in new equipment to launch a new brand of flavoured milk. It was to be packaged in plastic bottles, with a screw cap, to be sold at a very considerable premium to the products then only available in the gable top cartons, and we proposed to sell it to different consumers. Nobody had done this before, we were banking on tapping into a market completely under-serviced by existing packaging and branding. The Operations Manager at the time believed in the project, and put his neck on the line by committing  his R&M budget to refurbish some older gear in the absence of capital approval, and I ‘stole’ the required advertising funds from another brand.  We launched Dare Flavoured milk, and it delivered the fastest return on investment I have ever seen, and 25 years later, it is still going strong, delivering revenue and margins to the now overseas owners of the business.

If marketers started talking about revenue generation, rather than the more common ‘marketing-speak’ like positioning, segmentation, and all the insider jargon generated by digital, they will be taken much more seriously around the board table. Building support amongst other functions to acknowledge the long term impacts of intelligent marketing, is necessary for long term prosperity, and the only real measure of marketing effectiveness.

The management task is all about getting the most out of the assets and capabilities of your business, and it is marketing management that carries the usually unarticulated responsibility to drive the collaboration necessary to achieve the best outcomes.

This task has four dimensions:

Operational management, strategic management, Financial management, and performance ,management.

Strategic management is all about the manner in which you address your market opportunities and challenges, and has a long term focus on commercial sustainability.

Operational management is the manner in which you deploy and utilise the assets of the business on a day to day basis to add value that customers are prepared to pay for.

The financial management of a business provides the basis for the assessment of success, or failure. It is a scorecard that is capable of comparison, across activities, business functions and timeframes.

Lack of a good financial management framework is a bit like walking blindfolded into a minefield, you might be lucky for a while, but eventually you get blown up.

Financial management is far more than just running the numbers, and ensuring compliance with the tax and corporate rules, it is about being in a position to make the choices that need to be made across the business every day, that shape not just today, but build the resilience necessary for commercial longevity. Understanding the numbers is a core part of every management job, not just of the financial people.

Performance management. Performance management is all about getting the most out of the assets and capabilities your business has, and can purchase in, maximising the productivity of the assets of all types you have deployed.

Manufacturing is the backbone of the economy, and is not taken sufficiently seriously by current national leadership. While we migrate to an economy whose GDP is less dependent on ‘hard’ assets, to one that emphasises ‘services’ we fail to adequately factor in the foundations that manufacturing delivers. In our age of ‘digitisation’ the value coming from increasing productivity is ill defined by the measures employed in the past. We need a new suite of measures, based on the old, but adapted to reflect the reality of a changed world. This is particularly as it is now an international race, without the protection of geography, and less of the artificial protection of regulation, despite the regular hiccups that result from populist politics, and just keeping up requires a substantial effort and investment.

 

 

 

Is Facebooks ‘moat’ the best ever built?

Is Facebooks ‘moat’ the best ever built?

Apr 16, 2018 | Change, Marketing, Strategy

 

Building a moat seems an odd metaphor in a strategy and marketing post. Some explanation of moats may help.

My personal definition of marketing has been ‘The identification, development, protection and leveraging of competitive advantage’. Not a textbook definition, but one that has worked for me. In other words, build a ‘moat’ as a foundation block of your strategy.

Warren Buffet, who deserves to be listened to any time he chooses to speak, coined the term ‘economic moat‘ to describe his investment philosophy. Find an asset that has a ‘wide moat’, the wider the better, but is undervalued, and get  inside where the power of the moat can be employed to extract what economists call ‘economic rent’ or to us simple people, returns better than the average return on capital in that  industry.

Theory is that when such a valuable asset is identified, competitors will come in, and by the nature of competition  bring the return on capital back to the average. The game therefore is to be in front of the pack.

Moats are built in many ways. They can be wider, deeper, more turbulent, on the other side of a desert, be inside a ring of outer-moats, and so on. Point is, when there is gold in the castle, the barbarians will try and find a way to bridge the moat, and be prepared to spend proportionally to the size of the pile of gold in the castle.

Once you have a great moat built, which takes time, effort, and a lot of resources, defence becomes easier. However, defence is also static, the initiative is ceded to the opposition, so a wise moat owner busily uses some of the gold to build another moat somewhere out of the eye line of the barbarians. Unfortunately, most moat owners are so focused on the defence of  their current pot of gold that they hoard it, instead of leveraging it out of sight.

Kodak had a moat, a great one, deep, wide, incredibly well defended, but they left the side door to  their lab open so that the barbarians knocked off their own weapon, the digital camera, and used it against them. Better for Kodak to have taken the digital camera they developed down the road a bit and built another castle with a moat.

Same with Blockbuster. They even had the opportunity to buy Netflix, for what amounted to pocket money, but declined. Their moat got drained, and the barbarians came in the front gate.

All the noise around Facebook over the last month since the Cambridge Analytica fiasco surfaced was focussed last week on the sight of Mark Zuckerberg in the early stages of moat defence. Facebooks moat is perhaps  the best thought out, strongest, and best defended moat ever built. Not only are  the defences of Facebook itself daunting, but the pot of gold has been used to build a series of moats around Facebooks castle that are themselves defended with a series of interlocking moats.  66 of them since 2005, when Facebook itself was a start-up. Many we have never heard of, but all added to the Facebook moat system in some strategic way. A few however, have huge  moats themselves, still being built, and offering interlocking fields of defensive fire to the kings castle.  Instagram, WhatsApp, Oculus, were large acquisitions, on top of the impressive list of offensive and defensive tools developed in the Facebook labs and deployed strategically.

The US senate has been questioning Zuckerberg for a couple of days, and with some exceptions, making turkeys of themselves.  Senator Hatch has been a prime turkey, demonstrating breathtaking ignorance by asking how the business model worked,(1.30 into the video) and being unaware of the presence of ads as the revenue generator. The comparison between the questioners and Zuckerberg was so great the share price of Facebook went back up, delivering Zuckerberg a cool $3 billion for a few hours ‘work’

While you can build a deeper moat with that sort of loot, the real point is that the barbarians will now keep on attacking, using the regulators as their weapons of choice, and I suspect in time, as Zuckerberg himself acknowledged, they will be successful in getting a few across the moat. I suspect the barbarian scouts will look at the rules coming into force in the EU in May, the ‘General Data Protection Regulation’ (GDPR) which will mandate the manner in which consumer data is managed. It requires that consumer consent to the collection of data be explicit, that they have the right to be ‘forgotten’ and have the right to manage their own data portability.

Money and history is on the side of the  Zuck, he does not seem likely to make the mistakes Blockbuster and Kodak amongst many, made, despite the barbarians finding some potentially potent weapons. I cannot help but wonder if the turkeys are up to standard for the game that will be played.

 

Photo credit: Malcolm Gardner via flikr. Bodium Castle Cornwall

 

What have Facebook and Marjory Stoneman Douglas got in common?

What have Facebook and Marjory Stoneman Douglas got in common?

Apr 12, 2018 | Change, rant

Beyond the usual menu of war and pestilence in the Middle East, and which celebrity is bonking which, that usually dominate the headlines, two very significant items have emerged over the last short period.

  • The reaction of students at the Marjory Stoneman Douglas High School in Parkland Florida after the shooting on February 14 that killed 17 students, and wounded 17 more.
  • Facebooks relationship with the truth and your personal data.

Both have the potential to be tipping points, but the question is can they really generate sufficient traction to  result in lasting change.

The students at the MSD High school seem too have generated a response not seen before. The ‘March for our lives‘ rallies across the US, end even here in Australia are mobilising sentiment against the idiots who claim their unfettered right to own guns is inalienable, as never before. This shooting, terrible as it was, is just one of a very long line of mass shootings in the US, each met with political weasel words and sorrow for the victims, but nothing more.

But something has changed. Somehow.

Enough people seem to be prepared to say ‘enough‘ that some sensible changes may happen that will save a few lives.

Facebook has had its bum spanked by the only people who really count, those cloistered manipulators hiding in Wall Street, and a few high profile advertisers. The current congressional hearings may make for dramatic headlines, but unless regulation with teeth emerges, they will be just window dressing and a forum for congress members to get their names in the media.

The Facebook IPO in  May 2012 was at the time one of the biggest ever, valuing the company at 104 billion, $38 a share, to the surprise of many pundits, myself included. Since the IPO, immediately after which the $38 a share seemed very generous, Facebook has cracked the advertising monetisation code  and the share price was $185 as Cambridge Analytica emerged last week, then dropped like a stone to $162 before recovering a bit, wiping billions off the market value, and prompting Mark Zuckerberg to apologise in what seemed to be a pretty genuine manner.

The question is, will either be sufficiently sustainable to  generate change?

I think ‘Maybe’ on both counts.

US Attorney General Sessions has proposed a formal ban on ‘Bump Stocks’ the device that turns a normal semi-automatic weapon to become a machine gun, used with such effect in the Las Vegas shooting last year. A small but sensible step in the right direction, but perhaps more tellingly, businesses, large and small, are now publicly shunning the NRA, and adding their voice to the calls for change.

Momentum is building.

Facebook, as well as all other platforms for digital advertising,  has been under increasing pressure for some time, so much so that Zuckerberg released his new years resolution to ‘Clean up Facebook‘ on January 5. Early in 2017 P&G CMO Mark Pritchard took a huge swipe at the digital advertising industry in his address to the IAB, and there has been some changes emerging as a result, driven by other big advertisers taking Pritchards advice on board.

My view.

The ball is rolling on both counts, and momentum is building. Change will come slowly, and for some painfully, but common sense and decency will win in the end.

 

 

 

 

 

 

 

 

 What retailers can learn from the Game of Thrones

 What retailers can learn from the Game of Thrones

Mar 28, 2018 | Change, Governance, Leadership, Strategy

The ‘Game of Thrones’ series is an unlikely metaphor for Australian FMCG retail. There are however commonalities. Intrigue, politics, intense competition, vendettas, invasion by ‘wildlings,’ dumb decisions motivated by ego, desperate defence of the status quo, and more.

However, the world of retail is changing around us, just as did the world around Westeros, and potentially with similar bloody results.

The business model that has served so well since Piggly Wiggly invented the supermarket in 1916 is becoming redundant.

The incumbents are fighting to save the status quo, the invaders are looking everywhere for weaknesses to exploit, and the natives are restless, irritable, and open to offers.

All retailers, from the corner store to Walmart, Amazon, local farmers market, and the two Australian FMCG gorillas, Coles and Woolworths, work from a similar business model. All that changes in the model is the emphasis put on the different components.

StrategyAudit.com.au

All retailers are facing the pressure of change from the digital transformations of our world, what interests me specifically is the manner in which the Australian retailers are adapting, specifically Coles and Woolworths to the changes.

The gorillas consolidated their market power, still somewhere north of 70% by the relentless growth of market share through competitive pressure, and ruthless optimisation of their supply chains over time, leaving consumers with little option but to shop with them.

However, optimisation has a down side.

It breeds resistance to change, a dismissal of the minor disturbances that happen on the fringes, which are seen as little more than an irritation, unlikely to have any impact, and complacency. Just as Netflix was an irritation to Blockbuster, unlikely to be relevant, until it was, and then it was too late for Blockbuster.

It seems to me that the incumbents in Australia are paddling the same boat. Woolworths opened, then closed down Thomas Dux, in what I regard to be a great example of short sighted strategic stupidity, but at least they are consistent.  Then they botched in spades their foray into hardware with Masters, closing it down ironically as Wesfarmers buys into Homebase in the UK in an effort to spread the gospel of Bunnings. That did not turn out too well, Wesfarmers taking a $1.3 billion hit in February, and more recently announcing that the Coles business, apart from Bunnings and Officeworks would be flogged  off into a separate listed entity.

In other words, the incumbents are paddling around in the same warming pot as interlopers turn up the fire.

There is a lot going on at the fringes. Companies and technologies as varied as Amazon, Costco, Farmers markets, Harris Farm, Kaufland, various ‘pick your own’ schemes, organic, home delivery, and all the rest interrupt if not disrupt the market, and around the corner you have Alexa, AI, AR, Blockchain, personalised communications, Robomart, and who knows what else knocking at the door.

Optimising the existing model is coming to the end of its usefulness, the gorillas need to get out and get a bit messy.  They do not need to make huge bets as with Masters and Homebase, but they do need to clean out their own business model to make them easier to deal with, thus prolonging the profitability of their current investments, while building the retail model that will sustain into the future. If the best they can do is remodel an old crappy store into a very nice new one with better ranges, layout and lighting, as Woolworths has with Marrickville, then they are in trouble.

This is a big call, telling the future is not a productive pastime outside the circus tent, but having a lot of small bets on what it may look like would be useful. Take a long view, nurture some of the more looney ideas, and assume that the march of technology will not stop at a point of convenience for them, and one or two of the bets might turn out to be trumps. (whoops, not sure of I should use that word any more)

When I can help you consider the impact of all this change on your business, its profitability and longevity, get in touch, and I will be delighted to apply my knowledge and experience to solving your challenges.

 

Cambridge Analytica and Facebook stretch the boundaries of digital privacy.. Further…Again

Cambridge Analytica and Facebook stretch the boundaries of digital privacy.. Further…Again

Mar 22, 2018 | Change, Governance, Strategy

The Channel 4 expose of Cambridge Analytica last week has started a firestorm of commentary.

Rightly so, but  is it not ironic that the tools CA used to swing the US presidential election are now being used against them after the tactics were revealed?

Facebook, and all the other digital platforms are just wholesalers of eyeballs, in business to collect then monetise their access to personal information, freely given. This how they make their money, exchanging access to the very detailed personal information they collect on their platform users, to advertisers for money.

I wonder if any of us should be surprised at the revelations? This is what they do with our cooperation. The problem in this case is that 50 million of the people whose data was skimmed did not know it was happening and had not given permission for it to happen.The tensions inside Facebook, and the other platforms, between those whose job it is to generate the revenue, and those charged with the responsibility for data security must make for some pretty lively conversations!

The access to the a wider set of eyeballs, via the downloading Apps, games, surveys, and the rest with ‘Friends permission‘ such as the popular game ‘Farmville’ enables access to the personal data of friends of those who are engaged. This Friends access allows ‘thousands of layers of personal information on millions of accounts‘ to be collected. That data was then analysed by Dr. Aleksandr Kogan using the principles developed by  the Psychometrics Centre at Cambridge University. Dr Kogan analysed the data collected for Cambridge Analytica, that had the objective of developing and delivering messages specifically targeted at an individual in order to move their voting behaviour.

Truly scary stuff, science fiction just a few years ago.

Facebook has since suspended Cambridge Analytica and associate SCL (Strategic Communication Laboratories) from facebook, while defending their own actions claiming ‘Protecting peoples information is at the heart of everything we do‘. Suspension is apparently, the ultimate sanction. I guess that we should all be grateful they are looking after our privacy so well, and not going out hawking it in the local bar.

Facebook is really under the regulatory gun in all this, coming as it does on top of the revelations about Russian troll farms and the possible influence they had on the US Presidential election results. However, they should not be the only ones under scrutiny for the use of personal data for profit. That is simply the business model that has evolved in front of us as we all use social platforms of all types and names. Facebook just happens to be the biggest, and best suited to electoral ‘management’ if not fraud.

While the personal information zealots cry about making potentially life saving medical records available on line, and politicians of all colours bleat about how important information privacy is, a hard argument to beat, we all continue to give it away happily for access to ‘cat porn’ and the menu of the local pizza shop.

The debate should be a wider one.

How much power do we want concentrated in the hands of so few providers of digital tools, and how will we  regulate them to ensure they play a constructive role in the development of our communities and society. The follow up question is I suppose, do we have the political machinery with the skills and balls to do anything about the obvious answer.

 

Header cartoon credit: Partial ‘First dog on the moon’  cartoon The Guardian 21/3/18.

Update: March 23

Mark Zuckerberg has released a statement that acknowledges the problem, gives a timeline of what Facebook has done to secure information, but goes nowhere near an apology. I suspect there will be some flurries meant to make Facebook look better, and as a salve to those calling for regulatory action, but little if anything of any consequence will change.

Second update March 24.

I just stumbled across this editorial by Mitch Joel, to my mind one of the interesting and informed thinkers in this space, that really gives some added context to the conversation. It supports the view that none of us should be surprised, we have willingly participated in the end of privacy, and besides, use of social data to manage (code for swing) electoral outcomes in this way is well known.

 

Third update April 16. 

I was sent this very useful explanatory video produced by the NY Times, describing the sequence of events. Thanks Geoff!

Fourth update May 24.

Aleksandr Kogan, the data scientist behind SCL has his say in an interview with Buzzfeed.