Mass production has given way to mass customization. What was relevant in the Industrial Age is irrelevant in the Digital Age. The nature of the firm is changing accordingly. The firm no longer represents a mechanical form, a bundle of owned and static assets arranged in the most efficient manner. The form of the organization is no longer effective following the old military models of top down management and control.
Today organizations are a living organism, a beehive of ideas, to which people, whether employees or not, bring with them some of the key tools for production. Yesterday’s tools of production were machines and todays tools are minds.
Productivity and profitability are no longer created from the volume and cost of the inputs into, and outputs from, this black box we’ve called the corporation. Productivity and profitability are now directly related to how well the “living organism” recognizes, nourishes and enables the intangible assets that create value for all stakeholders and not just shareholders. In the 20th century we focused on margin, investment and asset productivity to achieve competitive advantage. This game has run its course.
The winners of the 21st century game will increasingly focus on trying to architect the collaborative capabilities of the intangibles – human, strategic, structural and relationship capital. These four intangible capital categories represent the economic engine of the “living organism” of the 21st century that is replacing the mechanical organization models of the 20th century.
As Herb Kelleher, the legendary CEO of Southwest Airlines, says “It’s the intangibles that are the hardest thing for a competitor to imitate…so my biggest concern is that somehow…we lose the esprit de corps, the culture, the spirit. If we ever do lose that, we will have lost our most valuable asset.”
Value Creation Is Outside The “Black Box”
Growth and value creation are not merely a function of the value produced within the “black box” rather from the network around the “box”. Growth drivers represent collaborative advantages created from interaction between tangible and intangible assets, few of which are owned by the firm. However much of the 21st Century economy is fueled by the intangible assets and the journey to measure, monitor and manage these assets is a discovery that has just begun.
Accounting, as we know it, was invented over 500 years ago to track executed transactions and tangible assets. This no longer works well when the economy relies heavily on tracking, monitoring and managing intangible assets.
As stated, this is no time for conventional wisdom.