How You Structure Information is a Source of Power

Taxonomies are how humans split the world into arbitrary mental categories in order "to tame the wild profusion of existing things" according to Michael Foucault, a post-World War II French philosopher.

Most industries have established taxonomies that hide their flaws. A few astute bosses know how to remold taxonomies, bending perceptions of investors, counterparties and staff. Mr. Bezos at Amazon is a dazzling case. In early 2015 investors were worrying that it was a low-margin retail business. Mr. Bezos changed its taxonomy by breaking out AWS, its cloud-hosting business, which was producing the holy grail of high, consistent and fast-growing cashflow. This move has been central to Amazon's resurgent stock price.

The most accomplished corporate taxonomists play a grand game; controlling not only how the firm is subdivided, but also whether it is viewed as a company at all. This is at the heart of Warren Buffett's accomplishments at Berkshire Hathway, which he insists is neither a conglomerate nor an investment vehicle, but is a one-off that can only be analyzed using a special set of rules that Buffett provides.

Masayoshi Son, the boss at Softbank, has just executed a similarly mind-bending classification leap. The firm has long been criticized for its weak cashflow and high debt. So, starting in 2017, Mr. Son began to describe it as a venture capial (VC) operation, to be assessed using the VC measure of internal rate of return (IRR), which is both flattering and unverifiable.

Mr. Elon Musk recatogorizes Tesla, claiming that it cannot be judged in the present, but only in the future, which he predicts using long-term production and market value targets.

By controlling how their firms are classified and subdivided, managers can often change perceptions, and in turn reality, lowering the cost of capital and intimidating competitors. Understand the power of taxonomies - it matters. The Economist