The Tail Wags The Dog

by Jay Deragon on 03/05/2013

Percent Intangible

The old assumption that a company’s value is driven by profitable growth and thus the strategy must focus on profitable growth is wrong.  Until leaders recognize this they will continue to act like a dog chasing its tail.

Creating value from profitable revenue growth produced from selling tangible things that produced tangible results was the business model of the industrial era.  In case you didn’t know we are way beyond the thinking that shaped the industrial era.

The sun has set on the business models of the past and new models are emerging on the horizon.

 

The proverbial “tail” of capitalism is financial results created from open markets of businesses filling consumer demand.  The “dog”, management, has chased the results “tail” based on the assumption that getting results was all that mattered for shareholders and management’s own job security.

The Wrong Perspective About Value

For the last 20 or so years we’ve witnessed the results of having a narrow perspective.  Chasing more results is what created the economic meltdown of the financial markets, the scandals of Enron, Country Wide, Lehman Brothers and Bernie Madoff’s epic scam along with hundreds of other examples. The dog has been chasing the tail and going nowhere and producing nothing but shame.

Clearly in most industries the tail (tangible results) wags the dog (chasing market value) in the current financial and business models that leaders follow. Yet these models no longer work in a market that recognizes the value of intangibles over tangibles.

Total shareholder value in the sample of 479 companies on which this chart above is based was $4.41 trillion.  The total value of intangibles was $2.95 trillion, or 67% as of 2008. The shift is value represented by intangibles has happened gradually over the last 20 years in sync with technological, social and economic changes enhanced by global connectivity of the human network. One would think that which such emphasis on creating intangible value corporate leaders might want to pay more attention to managing intangible things to create more value.

Dare we forget the results of chasing results and subsequently losing our moral compass?  We need to wake up and broaden our perspective to realize that value is more than financial results.  Yet the achieving financial results are a factor of leveraging intangible capital for the right reasons. Intangible capital represents human, structural, strategic and relationship capital that drives the value of all business. Chasing results with bad methods and no compass means the result will be meaningless.

Smarter Companies focus on improving intangible capital knowing full well the results will be meaningful to the market, the stakeholders and to their soul.

Comments on this entry are closed.

Previous post:

Next post: