Intangible World

Every time I read about a CEO explaining that his goal is to be the “biggest” player in his industry, I know that his company’s shareholders will ultimately suffer. A McKinsey study shows that over 80% of the S & P 500’s value can be attributed to “intangible” factors—which means that investors don’t appraise the future value of a company by its book value today—the size of its tangible assets carried on the balance sheet. Research indicates that projections of future earnings and cash flow are primarily influenced not by a company’s mass, size, and physical assets, but by its volume of intangible, such as: knowledge and data systematically distributed throughout the firm, cutting edge talent and the ability to attract the best and brightest, institutionalized foresight, a culture of constant innovation, speed and agility in capturing fleeting market opportunities, and reputation for rapid, efficient execution. Companies that have an abundance of intangibles grow in a healthy, profitable way, and ultimately their growth allows them to capitalize on the benefits of size--like scale, leverage, synergy, and marketing reach. But companies that focus on the tangibles (and too many leaders focus much of their time massaging current tangibles, or growing them via questionable acquisitions just to build sheer size and scope) are much more likely to collapse under their own weight. A couple years ago I consulted with a multibillion dollar company whose tangibles were staggering: a gargantuan balance sheet, a substantial payroll, a huge capital budget, and an immense product line. But this company’s intangibles were miniscule relative to its size. The company was marked by a sclerotic multi-layered management hierarchy, little innovation in product or delivery, paralysis in decision-making, archaic information systems, glacial bureaucracy, a dry new-product pipeline, and a hypercautious risk-averse culture. The result: a loss in net income and earnings for each of the prior eight quarters and a market valuation significantly lower than many smaller but more adventurous and cutting-edge (a.k.a. intangible) competitors. Even the products and services that are value-adding have become more intangible. Customization, design, speed to market, the “gotta-have-it” quality of the product—all that is intangible. The other stuff—the actual product or service—is more quickly imitated and commoditized. There's no sustainable growth opportunities in simply making ordinary widgets; the value-add occurs when embedding the widget into a bigger, intangible “widget solutions” package. Intangibles filter down to our jobs. Jobs with more intangibles pay more than jobs that are primarily tangible. If you’re a professional or manager, your kids probably think your work consists of talking on the phone, attending meetings, and pecking away on your computer. If your company tries to compete on tangibles—regardless of its size—it’ll be overwhelmed by cheaper foreign competitors on one end, and by innovative domestic (and international) competitors on the other end. Nowadays, it’s all about building your firm’s reservoir of intangibles. How much of your leaders’ daily attention and resources is spent on that vital quest?