CSC World: Competitive Fitness, From Assets to Information

The following is an abbreviated version of an article that appears in the September-November 2002 edition of CSC World.

By Adam Hartung & Mark Youngblood

Suppose you had a crystal ball in 1980. You gazed into its depths and learned that within a few years small, powerful computers connected by a vast telecommunications network would be commonplace in offices and homes. How would you have taken advantage of this vision?

You couldn’t have invested in Dell or Cisco because they didn’t yet exist. The smart move would have been to buy stock in Digital Equipment, Commodore, Atari, Wang, and AT&T - a smart move we now know would have been dead wrong.

Knowing the future doesn’t necessarily mean knowing how to prepare for it. That has been true to some extent for decades.

But it is especially true in the New Economy. When the New Economy was still new, analysts announced that the basis for competition had shifted from assets to information. That’s still true, and many companies are still trying to figure out how to adapt to that change.

Industrial vs. knowledge economies

After the dot-com bust, many traditional companies breathed sighs of relief. "See, I told you so," was the common refrain from established players. "They didn’t know what they were doing in our industry, and now they are gone. Business can now get back to usual."

Much to the chagrin of such companies, "the good old days" have not returned. The large brokerage houses have not been able to return to the high transaction fees they were forced to abandon in response to competition from online traders. Although the tougher stock market has stopped customers from leaving the established brokers and eliminated some of their competition, the big firms still find that pricing and profits are lower than they used to be.

The traditional players in many industries have been forced to lay off workers, slash overhead budgets, cut costs, and seek financial restructuring. Many have gone out of business. Business is no longer playing by the old rules because the marketplace, and the business assumptions companies once took for granted, have permanently changed.

One of those old assumptions is the value of physical assets. Business economics remains fixated on physical assets, such as manufacturing plants. But how much value is really in physical assets? If you were offered two bottles of vodka, one Wolfschmidts, the other Absolut, you probably would assign them different values. Are those value differences based upon the manufacturing plants, or even the products themselves? Or is it based on the information tied up in the brands?

The same question can be raised about manufacturing equipment. How much is a tool worth? If it’s sitting in Taiwan waiting for someone to ask for it, then it’s not worth much more than the market average cost of capital. But what if it’s being used in Germany to make a car? Is it worth more? Your inclination would be to say it depends on the demand for that car. If the manufacturer has a great brand and good distribution, then the company might make a great return on that tool. But is that an accurate statement? Has the company really made more money on the tool, or was it simply accounted for that way?

The question is, why should our German car company own the tool at all? Why not ask someone else to own it and tell them how to use it, allowing the car company to capture all the value of their customer knowledge without having to own the asset? Is the tool making money, or is something else (information) the source of value? Is the value in the asset (the tool) or in the ability to create value out of the asset?

Competing in an information-based economy

Old school companies tend to think the value is in the asset itself. Economists have made it clear that the goal of modern companies is to create an above average rate of return on invested capital. The company that can create the largest scale, and the best use of assets, will make the most money. But even companies that think they’re succeeding by maximizing asset utilization actually are doing something else.

Take as an example a client the authors once had, a company that manufactured and sold hydraulic hoses and fittings. We’ll call this company HoseKing. When asked why they were so successful, the president claimed, "It’s our products. We make the best products, and our customers have come to rely on our products for their hydraulic needs. Also, we have the world’s best factories, operating at the very highest quality, and allowing us to offer the best pricing in the industry."

However, when we interviewed HoseKing’s customers, they said nothing about the company’s manufacturing plant or product quality. They repeatedly stated that hydraulic fittings were all generic, that one company’s hydraulic hose was like any other’s. Customers felt confident that competitive bidding kept pricing nearly the same throughout the industry.

Then why did these customers buy from HoseKing?

Because of the match between their buying practices and HoseKing’s selling practices. Our client had been so close to these customers that they knew what the customers wanted, sometimes before the customer did. HoseKing could predict the customer demand, and anticipate the customer’s product needs. HoseKing could expedite critical items quickly to meet changes in customer needs (and they were very good at knowing what items to keep in inventory to meet expedited requests).

They knew how to combine orders on like products to offer better pricing than the customer anticipated. They knew how to invoice the product using the customer’s part numbers so customers could more quickly verify parts receipt and move the invoice smoothly through their own accounts payable process.

The company knew the customer’s preferences in fittings (materials, etc.) and could quickly recommend practical solutions when new designs were being considered. And the company knew how to evaluate parts failures quickly and make recommendations to eliminate costly down time and maintenance costs when the customer’s customers had field failures.

In short, what the customers valued about HoseKing was its ability to make customers’ lives easier and better by using all its information about the hydraulic products and its customer’s operations. If HoseKing quit making hoses and fittings tomorrow and purchased all of its product from someone else, it could still maintain its client base . . . and not have to carry and manage the inventory.

Increasingly, it isn’t the asset that provides value in today’s economy. What has value is the information captured in relation to the asset. We just regularly confuse the two. We often imbue the asset with the information, and then behave as if the asset itself has value.

Companies fear information-based competition because the old competitive advantages are not as useful as they once were. It is not at all clear, for example, that scale offers any value in information competition. The newest entrant to a business may quickly capture much of the business if they have superior customer, product, product use, distribution, customer behavior, service, or other information - even if they have little in the way of traditional assets. Note how quickly Amazon.com was able to upset industry leaders Borders, Barnes & Noble, and Crown Books. What used to make money now frequently doesn’t. Yet, what will make money is not at all clear.

Business and biology

Information-based competition doesn’t operate by the familiar rules of asset management. Industrial-era management practices treat organizations as if they were machines, emphasizing efficiency, uniformity, control, predictability, and economies of scale. These core principles have become locked into the values and assumptions of our organizational mind-sets.

This locked-in condition was fine as long as the environment remained fairly stable, which it did for a surprisingly long time. In this environment, companies could achieve a plateau of success and then successfully defend their competitive position for decades. When the environment changed, though, companies that did not adapt did not survive.

This process is very similar to what evolutionary biologists call punctuated equilibrium. In nature, very little happens for long periods, during which species specialize in a niche and compete within the boundaries of their environment. Then a precipitating event disrupts the stable environment and creates an interval of tremendous churn - a punctuation in the equilibrium of the system. During this period of turmoil, there is a massive die-off of the dominant species and an explosion of innovation as species that are better suited to the new environment take their places.

Predicting which species would survive in the new environment is another matter. Even if the crystal ball had told you in 1980 that change was coming, you would not have known how to make the most of that information. Focusing on the products or the assets that existed at the time of incipient change would not have allowed you to predict how that change would affect competition.

What we do know is that agility and innovation are the keys to success in uncertain environments. That’s as true in business as it is in biology. Companies that develop these capabilities, that focus on continual renewal, will be the ones that remain competitive.

This article is based on research for a forthcoming book on the implications of innovation and the role of information technology in business.

Adam Hartung is with CSC Consulting Group and Mark Youngblood is president of Quay Consulting.

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