A New(er) Economic Case Study

The new economy values intangible assets, as explained in this case study (hat tip Andrew Lynch) titled A Business Model For The New Economy, which breaks down the new business model for 21st century business realities.  Although the piece was ahead of its time (it was published in 2000; nearly 10 years ago), the majority of example companies they discussed are now either close to bankruptcy, cash flow negative or defunct.

This isn’t to say the writers were clueless.  They were beginning to suspect how value creation would shift from what it was in the 1980s and 90s, to how value is measured in a post-industrial economy.  In the article, they describe how:

The encompassing challenge that companies face in this new environment is how to identify and leverage all sources of value, not just the assets that appear on the traditional balance sheet.  These important assets–including customers, brands, suppliers, employees, patents, and ideas–are at the core of creating a successful business now and in the future.

The reason that this quote stuck out to me is because few professionals outside of academia were talking and spreading these ideas when this article was originally published.  It took our economy to collapse to bring them out of academia and into mainstream, strategic management conversation.

And here’s why.  Because to remain competitive, the old rules don’t work.  Real value creation is necessary, beyond the land and capital listed on a balance sheet.  Real value includes not just the order of assets, but asset combination and interaction.  The article describes that beyond physical assets and capital, a company’s true value lies in its relationships, intellectual property and leadership.

The interaction of these value sets is the DNA of a business model.  The “correct” combination can maximize economic value, and vice versa.  Here are three company examples which supposedly exemplified the “correct” value combination in year 2000, according to the article:

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America Online

The fact that the writers used “extraordinary value”, “America Online,” and “Time Warner” all in the same sentence is a failure in itself.  Although AOL seemed innovative at the time from the writer’s perspectives, it’s easy to look back and see exactly how their closed media business model drove them into the ground and pulled Time Warner down with them.  Yahoo was foolish to not have seen them as a warning, as their business model would backfire as well.

The articles describes how:

Clearly, one of AOL’s most important intangible assets is its leadership team.  AOL’s CEO Stephen M. Case and COO Robert W. Pittman devised the business model that would define and eventually dominate the fledgling online industry.

Here is Time Warner’s (TWX) (in blue) stock chart (who purchased AOL in 2000 when this article was published) under-performing the S&P 500 (in red) over the past 10 years.

Here are their subscribers for the same time period:

Long-term value creation?  I think not.

Starbucks

The case study describes Starbucks as:

Using employee assets to achieve phenomenal market penetration almost overnight.

I do think Starbucks is a fantastic brand, but their business model relied on an economy which remained strong, where consumers would spill out the extra cash for premium coffee.  Their culture had similar tactics, with new store openings every day and industry leading pay.  That’s not the “right” DNA for a new business model, or least one that aims for long-term value creation.

Now we see their profits crashing, stores closing and McDonald’s thriving.

Here is Starbuck’s (SBUX) (in blue) stock chart under-performing McDonald’s (in yellow) and the S&P 500 (in red) for the past 5 years.

Chrysler

Chrysler used lean production that turned Japanese auto manufacturers into global competitors.  They were one of the first brands to exploit outsourcing strategies.  The case study describes how:

Chrysler enhanced the value of its supplier assets by building long-term relationships based on the commonality of economic interests

It sounded great in year 2000.  Chrysler was an exemplary brand by reducing costs, profit boosting–thus maximizing value.  That is until:

On October 23, 2008, Daimler announced that its stake in Chrysler had a book value of zero dollars after write offs and charges.  Amid the 2008 automobile crisis, Chrysler announced in December 2008 that it was almost out of cash, and might not survive past 2009. After the defeat of the auto bailout in the Senate, Chrysler stated that they would most likely file for bankruptcy and shut down all operations permanently. On December 17, 2008, Chrysler announced that it would close all of its North American plants on December 19 for at least a month or longer. That same day, President Bush announced a $13.4 billion rescue loan for the American automakers, including Chrysler.

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Although the case study mentioned a few brands that would prove strong through 2009, including Idealab, Apple and Amazon, the exemplary models (America Online, Starbucks, Chrysler) have all taken a nose dive.  In my opinion, the case study failed to discuss the trade offs between short-term incentives and long-term value creation, which looking back, is where those companies went wrong.

Related Essays

• A New(er) Economic Case Study, Part 2
• Pitching Value
• The Trickle Strategy

• « Responsible Innovation
• » A New(er) Economic Case Study, Part 2

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