NEW CORE STRATEGIES FOR BUSINESS PROSPERITY

To explain competitive advantage, Michael Porter described the concept of?generic strategies?in terms of price and scope as a function of lower cost, differentiation, or focus.?

While premium vs. low pricing remains a powerful strategy, technology has allowed “free” to supervene trial and loyalty. Differentiation has also changed as many companies built upon, or that rely upon, technology, data, and intangible assets have created moats and sticky relationships.

Today a focus strategy to create competitive advantage is dependent upon, and a function of, these 4 factors:

o???Brand Equity

o???Intellectual Property

o???Human Capital

o???Network effects

These four pillars of business value creation are driven by the transition from tangibles assets such as manufacturing plants and equipment to intangibles assets such as human factors.

According to a report by Ocean Tomo?1, in the last 40 years, tangible assets have declined to 15% of business value, while?intangible assets now generate 85%?of value. Business worth is valued by these intangible assets of brand equity, intellectual property, human capital, and network effects.

Let’s explore some revenue and profit activities necessary for growth and innovation:

Brand Equity

As a life-long Ad Man, my view of Brand Value is best summarized by Peter Drucker who said:?"The purpose of a business is to create a customer. Business has only two functions -- marketing and innovation. All the rest are costs."

As such, the brand, across all instances, has material customer value. Brand awareness, reputation, and authenticity contribute to pricing and distribution power. The brand is a launch pad for new products and lines of business. The brand creates both the hook and anchor for customer loyalty.

There are many other instances of brand equity value in finance, law, and operations. For example, copyrights and trademarks enable highly effective legal moats to protect the identity and reputation of a brand. Brand Equity becomes Intellectual property. US and International laws provide protection, help lower costs of sale, and enable innovation and brand extensions. Apple and Nike are examples where premium pricing comes from the power of the brand.

Intellectual Property

Intellectual property (IP) includes trade secrets, designs, patents, copyright, trademarks, trade dress, databases, systems, processes, and Research & Development (R&D), and more.?

These IP assets can be legally protected, and with such protection enable unique innovations in all aspects of the business. IBM, Boeing, and Salesforce typify this approach.

Different IP have different values, but ownership does help create a moat to limit competitive incursions and increase financial leverage among investors and agents.?

Human Capital

Human capital has become a huge issue in many industries. For decades the technology (software, hardware, integration) and financial services (Private Equity, M&A, CDO) have paid top dollar for top talent who make outsized contribution to asset values and IP.

In cold business speak, people are Human Capital and represent intangible value, which is value beyond their direct cost (compensation). Having talented people is a huge asset to any company and defines capabilities; examples include Gucci, Google and Goldman Sachs.

Network Effects

Coincident to Michael Porter’s business concept of generic strategies, Bob Metcalfe explaining the network effect to the communications and technology industries. Network effects use relationships and data to become the assets of a connected business. Imagine a phone or fax machine where the each new “addressable” machine increases the value of every other in-place machine by increasing the number of connections.

Thanks to George Gilder in 1993, “Network Effects” became?“Metcalfe’s Law”?where an engaged ecosystem of external producers and customers grows exponentially.?

With the Internet of today and ubiquity of social networks, the greater the number of users with the service, the more valuable the service becomes to the community. Companies as far ranging as TikTok, Airbnb, eBay and Uber can, virtually overnight, grow from a small idea to a multi-million person global community.

CONCLUSION

These four core strategies can work in concert to form an enduring, powerful business. Innovation can be achieved with each strategy against one or all competitors.

Each strategy can be used offensively to grow customers, or defensively to create moats around production, distribution, and other operational activities.?

? 2023 Larry W. Smith @LiveIdea