Whether a company is public or private, built to last or to flip, the stock price or corporate valuation can be driven from both the bottom and from the top of the company P&L.
Traditionally, companies have focused their attention on the bottom of the P&L and on operating income as a primary fulcrum of company valuation. Most executives are well acquainted with the power of profitability to drive the value of their company.
Less widely known is the power of intangibles, specifically trademarks, to increase the value of a company from the top of the P&L. Of course, you can use the patents of a proprietary technology to bring a differentiated product to market, but your company won't get full financial credit for it if it isn't taken into its markets under the identity of a well-articulated brand. It is for this reason that brands, and their legal protection as trademarks, are often spoken of as the ultimate intangible assets. Brands and trademarks are 'ultimate' in the sense that they are the one piece of intellectual property that can be used to assemble all the intangible assets in a company into a meaningful economic whole that can move markets.
Interestingly, recent statistics suggest how companies can create new wealth by leveraging their intangible, intellectual assets such as trademarks. At the beginning of 2006, intangible assets accounted for more than 80 per cent of the combined market capitalization of the S&P 500 Index. This is a surprisingly high number, as during 1973, intangibles only accounted for five per cent of the combined index market cap. Today, intangibles are driving the lion's share of company valuation.
Why is this important? Because many companies today fail to recognize their intangibles, to strategically leverage them, and in particular to recognize the power of their trademarks to build valuable brand equity to meaningfully drive company value.
How do we leverage trademarks to create value? Most importantly, recognize that well-managed trademarks can become valuable brands that repay their investment with enhanced revenues, gross margins, and market share. Thus, investment in trademarks and brand-building can drive valuation just as directly as profitability does off the bottom of the P&L. In fact, it often drives value more quickly because of the exponential growth in brand equity that is possible from wise brand management. However, trademarks create this new value only when they are built into highly differentiated brands. They then become an intangible corporate asset capable of driving enterprise valuation.
The simple truth is that the only way to obtain a sustainable competitive advantage in today's markets is through differentiation, and one of the best, if not the only, vehicles for achieving enduring differentiation is a trademark. Trademarks are leveraged and differentiation is achieved through the mechanism of a brand strategy, or the disciplined and deliberate intent to make a brand stand for a complex set of values that beneficially separates it from the other players in the market. Importantly, for public companies, a brand strategy can also be used to directly drive market capitalization, and in many cases, it can do so a lot faster than operating income.
Brand strategies articulate and orchestrate brands to achieve differentiation by leveraging trademarks to accomplish corporate goals. For many companies, such strategies are the 'rocket science' of leveraging trademarks both to deliver competitive advantage and to create new financial value. For traditional companies, who rarely ask how they can leverage their intellectual property for strategic goals, using brands and trademarks in this way can represent a paradigm shift in how they build company value.
Lindsay Moore, PhD, is the founder and CEO of KLM, a management consultation firm in Boulder, Colorado, and co-author of Intellectual Property in Enterprise Success: Strategy Revisited, published by Wiley. She also is a professor of law at George Washington University Law School in Washington, DC. Respond: [email protected]