Russian Companies and Value Creation: The Role of Intangible Assets

Michael D. Moberly   January 24, 2012

I believe it’s necessary, if not essential that c-suites, boards, and management teams of U.S. based companies periodically take the time to look beyond the confines of their firm and personal-professional business experiences to seek out and study not merely what other countries, and their businesses/companiesare doing in the intangible asset arena, but also learn what and how those firms and their leadership are accommodating, interacting with, and otherwise engaging the global knowledge-based economy, that is unmistakably dominated by intangible (non-physical) assets versus tangible (physical) assets, where the former serves as the overwhelmingly dominant sources of value, revenue, and competitive advantage.

One such fine paper, I encourage others to ready and study is one co-authored by Drs. Tatiana Garanina and Dmitry Volkov, (both faculty members in the School of Management at St. Petersburg University) appropriately titled ‘Value Creation in Russian Companies: the Role of Intangible Assets’.  It is a timely paper!

In today’s vacillating and changing economy, the authors repeatedly make the point that management teams of leading companies are more apt to acknowledge and understand that the key sources for a company’s value creation are irreversibly rooted in its intangible assets.  Certainly, no argument here!

Quite interestingly, the manner in which the authors offer up this perspective is that….

  • as much as one third of all the effected investment solutions (in Russia) are based on a company’s existing intangible assets, and that
  • business decisions made on the basis of intangible assets allow management teams to make a more accurate prediction of income and profitability regarding their company in the future, and thus, projecting the company’s value for shareholders.

Equally relevant and timely elements of their paper, which the authors address, from a definitional perspective, are intangible asset composition and structure in which, through their analysis of 43 (sampled) companies, they distinguish intangibles into five aggregated fields, i.e.,

  1. mechanical engineering
  2. extractive industry
  3. power engineering
  4. communication services, and
  5. metallurgy.

Admittedly, this is a little different from western perspectives.  But, value creation through intangible assets, particularly in the previous decades, the authors state, represent new conditions for business development, but, which have not led to success for those companies which continue to rely on traditional/conventional tangible (physical) assets such as properties, labour, financial capital and other physical resources.

Such companies, the author’s note, are less able to cope with the aggressive and highly competitive market ‘rules’ which they advocate, further represents the importance and relevance of intangible assets by recognizing them as drivers of value and sources of competitive advantage.

Logic, they say, related to business in the knowledge-based (global) economy is advanced primarily by consistently achieving more…

  • favorable (business, transaction) outcomes, and
  • longer term (strategic) successes
  • through better value-creation through intangible assets.

Now, the authors submit that leading companies are trying to achieve not just cost reductions but value creation, which translates, in the author’s view, as reductions in the value of tangible assets, which, not-so-coincidentally advances another trend, which is the production of mostly intangible assets such as knowledge, know-how, and creativity, etc.

Another very astute point expressed by the authors is that, in their view, a key challenge for management teams and c-suites now is to create and develop the conditions that will allow them to increase the value of (their) intangible assets and therefore the value of the entire company!  That’s certainly true globally.

The intangible character of a growing percentage of (company, business) assets, the authors contend, is that not all intangibles are reflected on company balance sheets and/or financial statements, thus, they are not visible in a traditional (physical) sense. Sveiby, (1998) reportedly said that intellectual capital is “knowledge that can be converted into value”. Hence, the authors argue, only “intangible” value provides companies with opportunities to differentiate themselves from their competitors, thus, only managing a company’s intellectual capital properly will allow a company to achieve and preferably sustain competitive advantages over their rivals.

Perhaps, one of the more profound and thought provoking statements the authors make, is related to the composition and structure of intangible assets, i.e., intellectual capital. In many other research papers I have read, authors describe the ‘structure’ of intangible assets and try to define the primary component that (most) affects its market value. The authors claim there is no known uniformity, i.e., means, mechanisms, etc., to address this problem, at least in these researchers’ environment.

The paper is certainly not without its provocative perspectives put forth by its authors.  One example are their views on market capitalization value over periods of time. Even though, a number of theoretical works have stressed the strategic importance as well as the role of intangible resources as key value drivers for company’s competitiveness (Edvinsson, Malone, 1997; Sullivan, 2000; Wenner, LeBer, 1989); there remains, the authors believe, a lack of approaches that evaluate the mechanism by which these (intangible) resources actually contribute to create value (Carlucci, Schiuma, 2007). This is, they say, because of the idiosyncratic nature of these (intangible) assets (Hoskisson et al., 1999; Lippman, Rumelt, 1982).

As a result, the authors conclude more studies are needed in order to better understand…

  • the relationship between intangible assets,
  • the way these assets are clustered, and
  • their role in value creation.

Note:  This post represents a respectful adaptation of part of Drs. Tatiana Garanina and Dmitry Volkov’s paper titled ‘Value Creation in Russian Companies: The Role of Intangible Assets’. Both authors are members of the faculty at St. Petersburg University, in Russia.

My blog posts are researched and written by me with the genuine intent they serve as a worthy and respectful venue to elevate awareness and appreciation for intangible assets throughout the global business community.  Most of my posts focus on issues related to identifying, unraveling, and sustaining control, use, ownership, and monitoring asset value, materiality, and risk.  As such, my blog posts are not intended to be quick bites of information, unsubstantiated commentary, or single paragraphed platforms to reference other media. 

Comments regarding my blog posts are encouraged and respected. Should any reader elect to utilize all or a portion of any of my posts, attribution is expected and always appreciated. While visiting my blog readers are encouraged to browse other topics (posts) which may be relevant to their circumstance or business transaction.  I always welcome your inquiry at 314-440-3593 or [email protected].

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