Setting Long-Term Targets for Non-Financial Strategy Enablers. Is It Time? (Part 2)

The on-going shift from tangible to intangible assets as primary drivers of value creation have important implications for public companies long-term target setting. Intangible assets—such as intellectual property, brand equity, human capital, and technological capabilities—play a critical role in shaping a company's competitive advantage and long-term prospects. Recognizing and strategically leveraging these elements can significantly inform the development of non-financial long-term targets, providing investors with a comprehensive understanding of how these assets will enable business strategy and contribute to the achievement of long-term financial goals.

Historical Context: The Rise of Intangible Assets

Historically, tangible assets like machinery, buildings, and inventory were the primary measures of a company's value. However, the late 20th century marked a paradigm shift as economies transitioned towards knowledge-based industries. The rise of technology companies, increased emphasis on innovation, and the growing importance of brand and customer relationships underscored the value of non-financial assets. Today, many companies like derive a significant portion of their market value from intangible assets, reflecting the broader economic transformation.

Intangible or Non-Financial Assets as Value Creation Levers

1. Intellectual Property (IP): Patents, trademarks, and copyrights are critical in protecting innovations and creating barriers to entry. IP contributes to sustained competitive advantage and revenue streams through licensing and commercialization.
2. Brand Equity: Strong brands foster customer loyalty, enable premium pricing, and enhance market positioning. Brand value, built through consistent quality and effective marketing, translates into long-term profitability.
3. Human Capital: Skilled and engaged employees drive innovation, operational efficiency, and customer satisfaction. Investment in talent development, corporate culture, and leadership is essential for maintaining a competitive edge.
4. Technological Capabilities: Advanced technologies, including data analytics, artificial intelligence, and digital platforms, enable operational efficiencies, new business models, and enhanced customer experiences.
5. Customer Relationships: Long-term customer relationships and loyalty are vital for recurring revenue and market stability. Customer insights and engagement strategies are key to sustaining these relationships.

Developing Non-Financial Long-Term Targets

Developing non-financial long-term targets provides a more holistic view of a company's strategic direction and potential. These targets can highlight how intangible elements will enable business strategy, offering investors incremental information to evaluate long-term prospects and the probability of achieving financial goals. Key areas to consider include:

1. Innovation and R&D: Set targets for research and development (R&D) investments, patent filings, and the commercialization of new technologies. Highlight how innovation pipelines will drive future growth and market leadership.
2. Brand Development: Establish goals for brand recognition, customer satisfaction, and market share growth. Emphasize initiatives to enhance brand value, such as marketing campaigns and customer experience improvements.
3. Talent Management: Define objectives for employee engagement, diversity and inclusion, leadership development, and retention rates. Showcase programs aimed at attracting, developing, and retaining top talent.
4. Digital Transformation: Outline targets for digital adoption, IT infrastructure enhancements, cybersecurity measures, and data analytics capabilities. Demonstrate how technology investments will improve operational efficiency and customer engagement.
5. Customer Engagement: Set goals for customer acquisition, retention, and lifetime value. Detail strategies for leveraging customer data to personalize experiences, improve satisfaction, and drive loyalty.

Examples of Best Practices for Non-Financial Long-Term Targets

1. R&D Investment Commitment: One leading pharmaceutical company has set a long-term target to invest a specific percentage of its annual revenue into research and development. This target is aimed at maintaining its pipeline of innovative drugs and therapies, ensuring long-term growth and market leadership.
2. Brand Equity Enhancement: A global consumer goods company has established a goal to increase its brand recognition score by 20% over five years. This target includes launching new marketing campaigns, enhancing product quality, and expanding into new markets to strengthen its brand equity.
3. Employee Engagement and Development: A major tech firm has committed to increasing its employee engagement scores by 15% within three years. This involves implementing new leadership development programs, fostering a more inclusive workplace culture, and improving work-life balance initiatives.
4. Digital Transformation and Cybersecurity: A leading financial services company has set a target to fully digitize its customer onboarding process within two years and achieve industry-leading cybersecurity standards. This includes significant investments in IT infrastructure, adopting advanced data analytics, and enhancing cybersecurity measures to protect customer data.
5. Customer Loyalty and Satisfaction: A prominent retail chain has established a target to increase its customer loyalty program membership by 50% over the next five years. This strategy focuses on personalizing customer experiences, improving customer service, and leveraging customer data to enhance satisfaction and drive repeat business.

Communicating Non-Financial Value to Investors

Effectively communicating the value of intangible assets to investors requires transparency and a clear narrative linking non-financial targets to financial outcomes. Best practices include:

1. Integrated Reporting: Adopt integrated reporting frameworks that combine financial and non-financial information, providing a comprehensive view of the company's performance and strategy.
2. Clear Metrics and KPIs: Define and disclose key performance indicators (KPIs) that track progress towards non-financial targets. Use clear, consistent metrics to measure the impact of intangible assets on business performance.
3. Strategic Narratives: Craft compelling narratives that articulate how intangible assets drive value creation and support the achievement of financial goals. Use case studies, success stories, and future projections to illustrate this link.
4. Stakeholder Engagement: Engage with stakeholders, including investors, analysts, and employees, to explain the importance of intangible assets and non-financial targets. Use various communication channels, such as earnings calls, investor days, and sustainability reports, to keep stakeholders informed.
5. Regular Updates: Provide regular updates on progress towards non-financial targets, highlighting achievements, challenges, and adjustments. Transparency builds trust and demonstrates commitment to long-term goals.

By focusing on non-financial targets that emphasize the strategic importance of these assets, companies can provide investors with a more nuanced understanding of their long-term prospects and the likelihood of achieving financial goals. This approach not only enhances investor confidence but also aligns business strategies with the key drivers of modern value creation, positioning companies for sustained success in an increasingly intangible-driven economy.