Practise analysing intangible assets and their valuation difficulties using IB Business Management HL 3.4.3 questions and mark schemes.
Chips to Go (C2G) produce potato chips for the British market. C2G’s Chief Executive Officer (CEO) is Charles Chip who is a dynamic entrepreneur famous for taking risks with chip flavours such as “banana and sour cream” and “chocolate fudge” and promoting them with humour especially appealing to British culture. C2G has created a number of successful snack products under the C2G family brand. Charles uses intuitive rather than scientific decision-making. He rarely consults with senior managers or considers financial data. C2G’s value as a company in terms of goodwill, brand value and other intangible assets is tied very closely to the personality and lifestyle of Charles. He is the company’s most valuable intangible asset and is very popular among the younger generation. He is constantly in the news trying to travel around the world in a canoe, or taking risks by parachuting off high buildings to gain free publicity and word-of-mouth promotion. Current and potential investors have contacted the finance department as to what may happen to the value of these intangible assets if Charles were to have a serious accident.
Chips to Go (C2G)
Chips to Go (C2G) produce potato chips for the British market. C2G's Chief Executive Officer (CEO) is Charles Chip who is a dynamic entrepreneur famous for taking risks with chip flavours such as "banana and sour cream" and "chocolate fudge" and promoting them with humour especially appealing to British culture. C2G has created a number of successful snack products under the C2G family brand. Charles uses intuitive rather than scientific decision-making. He rarely consults with senior managers or considers financial data.
C2G's value as a company in terms of goodwill, brand value and other intangible assets is tied very closely to the personality and lifestyle of Charles. He is the company's most valuable intangible asset and is very popular among the younger generation. He is constantly in the news trying to travel around the world in a canoe, or taking risks by parachuting off high buildings to gain free publicity and word-of-mouth promotion. Current and potential investors have contacted the finance department as to what may happen to the value of these intangible assets if Charles were to have a serious accident.
C2G is looking for ways to increase market share in an increasingly competitive domestic snack market. One long-time aim for Charles has been the creation of a potato chip with all the taste of regular chips but without any fat. The marketing department of C2G is very excited with this idea but the Production Manager has indicated to Charles that it cannot be produced. Charles has been told and was furious.
A second strategic option could be to launch the potato chips into a new international market. One of Charles's closest advisers has argued that C2G would need to be careful with its product and promotion, as overseas customers may not share British tastes in potato chips, or British humour in promotion. He urges Charles to take time to carry out extensive market research of the new international market.
Explain two reasons why it may be difficult to value C2G's intangible assets.
From the stimulus, it appears that the intangible value of C2G as a company in the form of goodwill, brand value, reputation and so on is tied to the personality and lifestyle of Charles, as he is very popular with the younger generation. It appears that Charles is responsible for creating some of the innovative flavours, which have made the company so successful.
The difficulties of this for C2G's intangible assets is that it can be hard to objectively value the contribution of Charles's personality and lifestyle as well as his innovative attitude while the company is still operating. This can have a true positive impact on the brand value and effectively brand loyalty of customers, but the value can either be estimated or proven when the company is sold for a price above its tangible assets. Until then, the intangible assets can only be estimated if at all. Perhaps C2G can research the value of family branding more easily measured in terms of research on brand recognition, but the effects on personality factors can be very difficult to accurately measure.
Moreover, the success of the brand (and hence intangible asset) could also be down to very good promotion or targeting. Other companies without personality cults also have successful brands.
Innovation as a contributor to C2G's tangible assets can also be very difficult to measure due to the fact that one factor can be difficult to isolate in terms of its contribution to the intangibles.
Moreover inconsistencies of reporting systems between companies exist. Current financial statements provide very little information about these assets and there is not a standardized / unified method of valuation of the intangible assets. Therefore, the Financial Manager is unlikely to insert a figure that is no more than estimated.
Accept any other relevant explanation.
Mark as a 3+3.
N.B. the question is about the difficulties of the measurement - the difficulties of the process and methods of measuring. The question is not about if and how Charles is an intangible asset.
Award [1] for identifying a relevant difficulty in valuing intangible assets. Award an additional [1] for development of this point. Award an additional [1] for the application of the difficulty directly to C2G. Award up to a maximum of [3].
For [6] two difficulties of valuing intangible assets must be linked and explained with reference to C2G.
N.B. it is expected that apart from the personality / lifestyle of the CEO, one more issue is identified, explained and applied.