While the words in the above title can be individually understood, I would like to explain the context to bring out the objectives.
The 3 levels are:
Level 1: Industry in general with particular reference to business organizations which have created great value in the last two or three decades
Level 2: Your own employer or client
Level 3: Your own individual self.
Aim of this article is enable learnings from Level 1, to attempt improvements at Level 2 and Level 3.
Intangible Assets are distinct and different from Tangible Assets, which we can feel and touch.
Coming to Value Creation, let us answer the question, “What is Profit?” A small time Chaat Maker starts his day with Rs 400 in his pocket., procures all the ingredients required, makes different varieties of Chaat, and sells them in the market. At the end of the day, he counts his cash as Rs 600. Thus, he has made a profit of Rs 200. We could extend the story to say that, further, he was left with Rs 50 worth masala which he could use the next day, had a receivable of Rs 80, and owed Rs 70 to his vendor, to conclude that his Profit was Rs 260. In other words, Profit is net accretion to assets. Now let us see how this concept could be related to Value Creation, at the 3 levels mentioned above.
Level 1:
Ever since balance sheets are drawn up, assets known are physical assets like land, buildings, machinery and plant and inventory, and financial assets like cash & bank balances, receivables and investments. Traditionally, these assets accounted for a major component of market value of business organizations. Only intangible asset that came to one’s mind was goodwill, representing the brand value and appeared in the balance sheet, if it was brought into books. Now let us look at other intangibles, which are making a phenomenal impact on business valuations in the last two or three decades.
We could broadly categorise these assets as Customer Assets, Employee Assets, Supplier Assets and Organizational Assets. If we look at the valuations of well known internet companies like Amazon, Google and Facebook, in the last few decades, there has been a significant jump in their market valuation when compared with their book value, and it represented the value of their intangible assets not reflected in their balance sheet. These companies, through their innovative business models, exploiting the internet, are able to achieve phenomenal valuations, unleashing the potential of their intangible assets. In September 2019, Amazon’s book value has been $114.16 billion, and Market Value has been $1769.21 billion with a Price to Book Ratio of 15.50. In other words, in its market value, tangible assets represented 6.45% while intangibles accounted for 93.55% ! Market is willing to pay such a price for the organization’s potential for future profitability and wealth creation.
Level 2:
If you are an employee, your employer, and if you are a consultant, your client, are being referred to as “your organization”, here. Can we learn from the business models of large successful enterprises like the above, to add value to your organization, by focusing on the growth of its intangible assets? First, we need to identify what are its intangible assets, and then attempt to assess their potential for growth and positive business outcomes.
In relation to your employee assets, some of the questions to ask are:
Do we recognize that employees are an important asset, deserving the attention of the top management
Do you follow best practices in human resource planning, talent acquisition, training, performance monitoring and rewarding the right people? And
Does your organization provide clarity on authority, roles & responsibilities, and reporting relationships?
In relation to your supplier assets:
Do you have a proper Vendor selection and induction process?
Do you follow competitive bidding process while awarding contracts? And
Do you blacklist non-performing vendors and organize suitable replacement?
In relation to your customer assets:
Do you consider right customer acquisition an important goal?
Have you made customer satisfaction a Key Performance Indicator? And
Do you constantly explore areas where you could add new services to your customers?
When it comes to organizational assets, it is much wider in scope. Leadership, strategies, systems and processes, knowledge sharing, information for decision making, intellectual property, brands, reputation – all become very important.
Level 3:
Let us come to your level, and see how one could add value to oneself through the concept of intangibles. Your tangible assets are obvious, like the properties you own, your investments, vehicles and bank balance.
Under intangibles, integrity tops the list of personal qualities, I value most, and the rest are listed below in no particular order.
Conceptual clarity, ability to organize thoughts, ability to express, listen to unpleasant feedback, self-assessment of own commitment levels, having goals in life, converting them into tasks and pursuing, avoiding waste thoughts and developing powerful thoughts, attempting to extend the sphere of your positive influence to others, keeping anger, ego and jealousy under check, keeping materiality in mind, abundance mentality and loving your own efforts.
For more articles from me, please read my book “Translating Operations into Money” a collection of my actual work experiences over 3+ decades, narrated as business case studies. The book is available for online purchase at amazon.in and notionpress.com . Please visit www.operationstomoney.com to know about the book.
Tulasi S Sastri
FCA, CISA
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