The Paradox Of Intangible Asset Success – Part 1
The Paradox Of Intangible Asset Success – Part 1
Laziness is one thing; blindness is something else entirely
The worst business conversation begins with the sentence, “Why didn’t we see this earlier?”
Countless businesses have collapsed simply because they didn’t understand how their intangible assets might help them take advantage of emerging technologies and social changes. They forget where their true value lies and the problem they are trying to solve.
Nothing is new under the sun. Aside from a few companies dealing in “fads,” almost no company goes out of business because people don’t need the product or service anymore. If a problem hasn’t been solved, then the market will still require a company to solve it. The only question is: is your company innovative enough to remain the preferred choice for solving that problem?
What makes your company special? How is it solving a core market problem? Is that solution the most efficient method available? Does your company own any intangible assets that could keep it at the top of the pyramid if those assets were deployed more wisely?
Again, if the market problem still exists, then there’s no reason why any company that solves that problem should ever go out of business. The only time this happens is when a rival finds a smarter, more efficient way to solve that problem. In other words, the victor is the one who finds a way to use their intangible assets to gain greater market share.
What exactly is the difference between products sold at Walmart compared with those at Costco? Aside from the top-line differences (product sizes/weight, store layout, prices, etc), they are both solving precisely the same market problem: placing products in a convenient location halfway between a manufacturer and the customer. Each Big Box retailer performs this function slightly differently which is why they can coexist – but their market purpose is identical.
Once you start to look at the world in this way, it becomes obvious that intangible assets are the core driver of the competition dynamic and are responsible for the entire value of modern businesses.
Multiple companies doing pretty much the same thing are allowed to swim in the same pond because they aren’t doing precisely the same thing. Each has its twist, whether that’s brand, innovation, patents, etc. Take that twist away, and we wouldn’t need more than one company for every market problem.
Intangible Paradox
But that’s the paradox of intangible assets.
If the twist on a product or service lets your company monopolise a niche, then that intangible asset – whatever it is – was clearly the most efficient option for solving a customer problem. Yet that’s just one side of the paradox.
If that little twist isn’t the most efficient option – it was just the most efficient option at the time – then dominating the niche can soon become a liability since a monopoly is often a disincentive to innovate (why change something that works?). If a rival comes up with a better option for solving a problem, then they will dominate instead. At that point, the incumbent will say, “Why didn’t we see this earlier?”
And that’s the thing. They couldn’t see it earlier. Their dominant position gave the incumbent a completely different set of incentives for deploying their intangible assets at the cutting edge.
Of course, hindsight is 20/20, to use another cliché. Once an opportunity is described, the solution becomes obvious to everyone. And if we’re getting the excuses out of the way, the business world has a lot of luck involved as well. Sometimes a visionary leader does see a problem clearly and pivots in the right direction. But a successful strategy is often a result of the right time, right place, not clairvoyant forethought.
Even with these caveats, it is possible for companies in a dominant position to spot, understand and then execute on an opportunity as the sands shift. The key, as the great philosopher Socrates once said, is to “know thyself.” In business terms, this means knowing what truly makes your company special – its intangible assets.
Yet this is unfortunately rare. The far more common outcome is that the dominant player loses sight of what makes them special.
In the universe of Big Box retailers, the archetype of “Why didn’t we see this earlier?” is Sears. The lesson of Sears is a masterclass in what happens to a dominant player that forgets its mission and fails to understand its intangible assets.
The Sears Story
You might not remember Sears, but it was a big deal in the US right up until last year when the company filed for bankruptcy just before Christmas. Only as recently as 2016, Sears was generating $US13.8 billion in revenue each year. It’s not often that a Big Box retailer goes out of business.
So, what happened? Why did this giant stumble and fall?
Sears was founded in 1893 by Richard Sears and Alvah Roebuck (Julius Rosenwald eventually joined with an injection of capital).
The initial idea for Sears was to solve a very simple problem: getting goods to rural areas. Its solution was elegant and efficient for the time. The business model involved a mail-order business that could compete with local general stores (think of the "General Store" buildings in all those Western movies – these were the only competition Sears had for decades). The founders had worked on railroads and came up with the mail-order idea when they noticed how middlemen would tack hefty margins on products as they moved west towards the general stores.
The biggest cost for general stores was that they never quite knew how much inventory to buy. All they had was rudimentary data showing what sold in previous months which let them extrapolate those trends. If a new product appeared, the store owners would cross their fingers and hope the townsfolk wanted it. There was a big risk no one would want it, and therefore the new product would take up limited space in the General Store for months until it could be sent back.
The result was that General Stores only experimented with new products on rare occasions, preferring instead to stock up on popular items and staple goods. Companies still wanted to create new products, but such long and delayed supply chains meant the feedback loop for what was popular simply wasn’t conducive for measuring market demand.
The three founders saw the problem and came up with an efficient solution to tighten that feedback loop. The solution? A catalogue, the famous Sears catalogue. The first edition released in 1893 was about 300 pages in length and it had everything, along with pictures and fun marketing copy describing the goods and products.
What’s In A Catalogue?
Pause for a second and think about this catalogue idea.
All the way back in 1893, a group of normal men came up with a mail-order catalogue that sold whatever was for sale – machinery, bikes, toys, dry goods, you name it.
Does this sound like another business you know? Maybe a business that starts with “A” and ends with “mazon”? Perhaps you can already see where I’m going with this.
The Sears catalogue was a huge hit (although nothing happened quickly back in the 19th century). Every year the Sears team wrote and printed a new edition of the catalogue and after a few decades, it became as much an American institution as apple pie. If the company had figured out a way to sell apple pie hot out of the oven, it probably would have included that in the catalogue as well.
For much of the American population at the turn of the last century, the Sears catalogue gave them a decent quality, low-cost version of every mass market non-perishable consumer product available in the US that wasn't a car (although Sears did sell cars at one point early on. It also sold mobile homes up until the 1940s).
Customers could pick from a comprehensive list of items, mail in their order with a cheque and in a few days or weeks the packages would start arriving on the new, nationwide train networks. If a customer didn't like what they ordered – for any reason – Sears offered a "satisfaction guaranteed" policy that allowed customers to return an item and receive a full refund. That was only possible because of the efficiencies Sears had created by leveraging the technology of railroads.
Sears had clear foresight and a great strategy that kept it on top decade after decade, with no real competition appearing from any angle or sector. It was the definition of a dominant monopoly.
In 1931, Sears started an insurance company called Allstate. It also bought the financial investment firm Dean Witter and real estate broker Coldwell Banker in 1981. In 1984, it started a joint venture with IBM called Prodigy, an online computer service that was essentially a prototype of AOL.
A year later, Sears launched its own major credit card, the Discover card. For a long time, the only credit card anyone could use while shopping at the largest department store in the US was the Discover card.
Due to its efficiencies (its intangible assets like relationships, brand and industry expertise), Sears could create multiple successful business lines in wildly disparate sectors like real estate, insurance and financial planning.
By 1993, on the 100th anniversary of the catalogue’s inaugural release, Sears had built up a considerable reputation in the minds of customers. Sears didn’t offer the lowest prices (Walmart has always been the cheapest option), but it had what people needed and it offered those goods at affordable prices. On top of this, the customer service quality was second to none – far better than Walmart’s customer service.
Things were going so well at Sears that it is hard to think of any reason why it would change its business model. Yet, it did.
And this is where the story gets good.