The theories around development and execution of strategic management disciplines have evolved over time. We have shifted from long drawn out planning processes around “hard numbers” to real time simulation based on leveraging intangible assets.

Peter Drucker was a prolific strategy theorist, author of dozens of management books, with a career spanning five decades. He stressed the value of managing by targeting well-defined objectives. This evolved into his theory of management by objectives (MBO).

Strategy theorist Michael Porter argued that strategy target either cost leadership, differentiation, or focus. These are known as Porter’s three generic strategies and can be applied to any size or form of business.

W. Chan Kim and Renée Mauborgne countered that an organization can achieve high growth and profits by creating a Blue Ocean Strategy that breaks the trade off by pursuing both differentiation and low cost.

Over-reliance on any particular approach to strategy is dangerous and that multiple methods can be used to combine the creativity and analytics to create an “approach to shaping the future” that is difficult to copy.  What we know and continue to learn is that intangible value, and how an organization’s creates it, is very difficult to copy.

Emphasize Strategies That Build Intangible Value

Greg Satell writes in Forbes “How Technology Is Changing the Way Organizations Learn“: Just as the first industrial revolution transformed business and society, this new algorithmic age will bring not just efficiency, but significant, cultural changes.  While the future is unclear, some of the shifts are already becoming apparent:

Bayesian Strategy:  The knowledge economy coincided with the rising influence of business strategists.  Highly trained executives would analyze business conditions and devise intricate plans for the future.   Managerial performance, therefore, was widely evaluated as a function of their ability to “execute the plan.”

However, good strategy is becoming less visionary and more Bayesian. Strategic plans will play a similar role to “God parameters” that will be honed through an evolutionary process of simulation and feedback.  Strategists, to a great extent, will become hackers rather than planners.

Brands as Open API’s:  One little noted consequence of the knowledge economy is the rise of intangible value, which often far exceeds tangible assets in corporations.  

Brands, therefore, became tightly controlled assets that were nurtured and protected. That’s beginning to change as brands are becoming platforms for collaboration rather than assets to be leveraged.  

Marketers who used to jealously guard their brands are now aggressively courting outside developers with Application Programming Interfaces (API’s) and Software Development Kits (SDK’s).  Our economy is increasingly becoming a semantic economy.

According to The Wall Street Journal the most valuable companies today, with a few exceptions, make most of their money from intangible assets. In today’s post-industrial society, the preponderance of corporate wealth is created from the elements of intangible capital: human, strategic, structural and relationship capital.

Smarter Companies enables organizations to build intangible value by providing tools to inventory their intangibles measure them against peers and define the internal strengths and weaknesses (see their 5 Step method here). Only then can you begin to create strategies that build more value from those intangibles.

Often when you attempt to engage management in a discussion about the importance of managing intangibles their body language and attention span screams disengagement. It is as if the word “intangible” has become the politically incorrect word forbidden from corporate speak.

At the same time the business world is being surrounded with a growing body of evidence that intangibles have significant impact on corporate performance. HBR, Fortune, Forbes, Business Week, Fast Company, Inc., Wall Street Journal Editorial and a host of other top media stories are dominated by evidence of impact on operating results things like organizational culture, human capital, employee engagement, customer relations, values and all that which has historically been labeled squishy —the intangibles.

Just maybe the word intangible is the problem but that is no excuse to ignore the value of intangibles and their direct impact on results. All the “soft stuff” that isn’t on the operating statements or balance sheets is now showing evidence of influencing organizations results more than all those things we’ve previously been counting and reporting to accounting.

Intangibles Are Coming Out of the Closet

Mark Crowley writes in Fast Company:  Over the past year, Gallup researchers interviewed nearly 150,000 workers–people in all states and industries–and discovered that a stunning number are miserable in their jobs. More specifically, only 30% of the nation’s working population today admits to being fully engaged at work. While Gallup encouragingly notes that there’s been a slight improvement to engagement since the Great Recession, it’s hard to cheer when you realize 52% of Americans admit to being disengaged in their jobs, and another 18% to being actively disengaged.

To fully comprehend these grim stats, imagine crew teams out on the Potomac River where three people are rowing their hearts out, five are taking in the scenery, and two are trying to sink the boat. It’s hard to conceive how businesses can thrive when so few people are working to move it forward.

A decade or so ago, many in business dismissed the notion that there are clear links between employee engagement and an organization’s overall success.  Gallup’s report specifically states that engagement drives greater productivity, lower turnover, and a better quality of work. For punctuation, it adds: “Organizations in the top decile of engagement outperform their peers by 147% in earnings per share, and have 90% better growth trend than their competition.”

Now consider the above article only addresses the value of employee engagement which is only one of many intangible assets under developed and mis-managed within organizations today. Just imagine what kind of results your organization could achieve if you were able to identify and improve upon the performance of all the important intangibles that drive results.

There is no need to imagine anymore rather the need is to take tangible action to understand and manage the intangibles.

As digital technology continues to play an ever increasing role in our economy how we define and measure that which creates our economic value will be transformed.

It is becoming evident that today’s accounting methods are missing a large part of how and what creates value for a business. We’ve become obsessed with measuring the productivity of people, processes, products and customers as pieces to optimize and count on the operating statements as income and expenses. Yet most of these items are actual assets but our accounting systems do not count them as so.

As information technology created more and more opportunities for automation, a new class of productive assets arose. They include knowledge, data, processes, know-how, networks, relationships, brands and much more. Most of these “assets” never make it to the financial balance sheet and are described as “intangible.” In an intangible economy, the core assets of a company are NOT on its balance sheet. They are invisible and usually go unmeasured.

Since no one is keeping track of these new assets, there is no easy way to see whether a company is continuing to invest in its productive assets. You can’t see whether knowledge is growing. You can’t see whether the company has enough intangibles to meet current obligations and fuel future growth. You cannot see what these intangible assets are. BUT just because you cannot see them does not mean they are not there. Companies invest million in intangibles–their accounting systems simply are not capturing the value.

Economic Measures Will Change In Time…

With Wall Street’s continued demand to maximize shareholder value, the recognition that people are an asset makes a compelling business case for several reasons.

1. Academic and private sector research suggest that companies that invest in their employees, and therefore create a positive environment in which they can work, perform better financially than their competitors. Stakeholders, however, deserve access to data beyond a letter from the CEO that would verify this fact.
2. The number of socially responsible investors is only on the upswing, and a transparent methodology by which stakeholders can measure this metric will only win trust and additional investment in the long run.
3. Wall Street’s fixation on short-term results will change as a new valuation paradigm will emerge and subsequently encourage executive behavior to invest in their employees, not drop the axe when a bad quarterly report hits the news wires.

The Digital revolution is changing how markets behave, how consumers spend, how brands engage and what the human network considers meaningful and valuable. All of these are the elements of a new economy. Sooner than later businesses and governments will wake up and recognize the need to change the way economies are measured and Human Capital will be recognized as an asset.

Then we will witness an economic revolution like we’ve never seen before.

The mental models that many business leaders rely on to run their businesses is wrong. They believe that building or buying  tangible assets and selling said assets to buyers is the way to build a sustainable business model. It used to be but no longer is relevant to the buyer preferences in the 21st century.

The industrial era was based on mass production, productivity, process efficiency as the means to optimizing profit. Business trained people to run machines, processes and other people at maximum efficiency as if “people” were merely cogs in the wheel of labor all aimed at maximizing productivity for profit.  People were measured based on contributions to profit, productivity and compliance to processes designed to do the same.  Our educational systems were designed to teach methods of repeating or improving upon these mental models so that American industry could fleck its mighty muscle around the world and we did.  We were great and proud of our greatness then a new generation of Americans awoken to the folly of the past and said “we won’t climb that tree and because we won’t doesn’t mean we’re stupid“.

Then business began to change their mental models because people defined a new set of assets that mattered to them in the 21st century. But the change was slow but the peoples demands increased in speed.

The Assets That Matter Now

Seth Godin writes in “The Icarus Deception: How High Will You Fly?” Successful organizations have realized that they are no longer in the business of coining slogans, running catchy ads, and optimizing their supply chains to cut costs. And freelancers and soloists have discovered that doing a good job for a fair price is no longer sufficient to guarantee success. Good work is easier to find than ever before. What matters now:

1. Trust
2. Permission
3. Remarkability
4. Leadership
5. Stories that spread
6. Humanity: connection, compassion, and humility

And here’s the thing: All six of these are the result of successful work by artists. These assets aren’t generated by external strategies and MBAs and positioning memos. These are the results of internal trauma, of brave decisions and the willingness to live with dignity. They are about standing out, not fitting in, about inventing, not duplicating.

When the assets that matter change then everything that matters to a business changes. Some will get it and make the necessary change matter while others will fake it and they will not longer matter to people. You know, the ones that created your value, paid your bills and tried to tell you what needed to change.

But you were to busy believing you were smart and they simply didn’t know how to climb your tree..

A medium sized business has been in business for over 30 years. It has over 200 employees and operates on very thin margins. Small errors can cost lots of money and even the loss of lives.

The owner works long hours and deals with stressful situations on a daily basis. The owner is a man of character, dedicated to people and carries everyone’s mistakes on his own shoulders. He has an operations manager who has been loyal yet lacks formal management education. The operations manager constantly creates internal conflicts and makes poor decisions that end up costing lots of money.  The operations manage has been with the company for over 10 years.

The people that work at the company have lots of experience in their field and a wealth of knowledge in their particular disciplines. Many of the people have observed the foolish decisions made by the operations manage and wonder why he remains and how he continues in his position. Yet many of the same people know they would lose if they questioned his authority or suggested he wasn’t capable of managing. So the people come to work and try to do their jobs even when constrained by foolish decisions and poor management practices.

The finances of this company have been on shaking ground for nearly ten years and continue to worsen over time. Yet banks, investors, customers, owners and employees continue to stay engaged.  Why?  Because no one has access to the whole story.

The Untold Story

The untold story about any company is the always the other half of the story.

Companies create narratives designed to put themselves in positions that serve their purpose. The narratives are crafted for different audiences. Banks and investors get a financial narrative; employees rarely get a narrative and customer get whatever narrative creates the most satisfaction whether true or not.  In each of these narratives there are usually untold stories.

Much of the narrative for any audience during the 20th century has been kept in silos, managed with an agenda aimed at keeping the audience engaged regardless of whether or not they ought to have known the total story. The accounting games learned in the 20th century taught businesses how to set up subsidiaries, move expenses, revenues, capitalize losses and investments and the shuffle game continues in the 21st century.  They used to call it cooking the books but that sounded criminal so now it’s called “creative accounting”.

The 21st Century is ushering in a 360 degree transparent view into any organization’s operations.  No matter what the tangible financial picture is the market can now get a balanced view of any business simply by “listening to its stakeholders” and the intangible attributes.

Simply by listening anyone can determine how much intangible capital an organization has by hearing noises from the market of conversations. Conversations indicate levels of relationship capital, exhibit the depth of human capital, speak to the value created from strategic capital and witness the reach and scale of structural capital.

Intangible capital is the untold story that brings balance to any business story because it is in the narrative of human voices.

Sometime in the near future the next generation of business leaders will look back on today’s business practices and wonder whether we really cared about results.

Today’s management practice are centric to measuring anything and everything that moves. Whether it be a process, a product, some form of media, people, markets and all things tangible that can be measured and correlated to the achievement of results.  We even consider some of the intangibles like the number of followers, fans tweets, like’s and friends as a measurement that means something to the recognition of a brand in the minds of buyers. Then that recognition is correlated to results to justify more expense to spend more on the intangibles.

At the end of the day the only measure that matters for today’s business leaders is what result goes into the accounting system. Those are financial measures which represent the outcomes of  all the moving parts, both intangible and tangible. Or at least we thought they did.

Have We Missed Some of The Parts?

It is becoming evident that today’s management practice, including accounting, are missing a large part of how and what creates value for a business. We’ve become obsessed with measuring the productivity of people, processes. products and customer as assets to optimize and count on the operating statements as income and expenses. These are some of the parts, not the whole.

Mary Adams writes “The Problem with Accounting”: You see, accounting has the unenviable challenge of applying a tool set designed for the tangible economy to the rapidly-changing and radically-different intangible economy. These standards favor tangible assets and generally recognize spending on intangible assets as operating expenses. This approach has failed to measure or capture the enormous value in the knowledge, ideas and connections that companies have been able to build using information technology and the internet over the last 30 years. These intangible knowledge and collaboration assets are the key drivers of revenues and profits in almost every company today. But since they exist outside the balance sheet, the tangible net worth of the average public company in the U.S. is equal to just 20% of its total corporate value. The rest is., well, intangible and generally not well-understood. 

The future business leaders will understand the value of measuring the whole so they know what is driving the results which matters more than a result of a few parts after the game is over.

Everyday stories appear which illustrate the value of intangibles to the creation of value for business. Value creation for a business is paramount to finding and keeping customers.

What enables a business to find and keep customers are good experiences the business creates in a marketplace… experiences that get shared with others.

In today’s connected world “others” becomes a large audience quickly and even more so when the customers experience is a bad one.

Experience is an intangible asset that represents relationship capital which gets translated into tangible results. Relationship Capital is created through the interactions a business creates with its customers as well as the messages and images it creates and the quality of service provided. Relationship Capital is not created in a silo rather it is intertwined and supported by an organization Strategic, Human and Structural Capital all of which are intangible.

Even with clear evidence as indicated below businesses fail to identify measure, monitor and improve upon the intangibles so they can improve upon the results.  Consider the following:

1. Price is not the main reason for customer churn, it is actually due to the overall poor quality of customer service – Accenture global customer satisfaction report
2. A customer is 4 times more likely to defect to a competitor if the problem is service-related than price- or product-related – Bain & Company.
3. The probability of selling to an existing customer is 60 – 70%. The probability of selling to a new prospect is 5-20% – Marketing Metrics.
4. For every customer complaint there are 26 other unhappy customers who have remained silent –Lee Resource.
5.  A 2% increase in customer retention has the same effect as decreasing costs by 10% –Leading on the Edge of Chaos, Emmet Murphy & Mark Murphy.
6. 96% of unhappy customers don’t complain, however 91% of those will simply leave and never come back – 1Financial Training services.
7. A dis-satisfied customer will tell between 9-15 people about their experience. Around 13% of dissatisfied customers tell more than 20 people. – White House Office of Consumer Affairs.
8. Happy customers who get their issue resolved tell about 4-6 people about their experience. – White House Office of Consumer Affair.
9. 70% of buying experiences are based on how the customer feels they are being treated – McKinsey.
10. 55% of customers would pay extra to guarantee a better service – Defaqto research.

The rules of business in the 21st Century require a change in our thinking if we truly want to improve results. We must start by changing the way we think about intangibles.

There was a time when sellers took advantage of dumb buyers. Buyers were dumb simply because they didn’t have access to enough information to make informed decisions.

Sellers knew this and took advantage of the situation and manipulated markets for the sake of higher financial gains. Suppliers were squeezed, employees were expenses, the environment wasn’t a consideration and the entity was a slave to its shareholders.

Then times changed when the internet enabled information about anything and anyone to be freely available. Then buyers became smart and sellers had to provide more information about everything. Not only did the buyer become smarter but so did the employees, the suppliers, the community, and the shareholders so the demand for more information, more transparency and smarter decisions from the seller increased dramatically.

Marketers learned to spin information in entertaining ways. Using social technology sellers used media to look transparent and socially oriented by manipulating “friends and followers” with “rewards and incentives” as a tool to create brand loyalty. New measures followed like engagements, interactions, touch-points, clicks and a host of others means for the new socially oriented seller to justify their efforts to better serve and inform the buyer. But the buyer saw through the seller’s selfish intent and understood that all these efforts were self-serving.  The seller’s actions did not represent the needed transformation in thinking about giving people information to create and experience more value.

Then the sellers decided they needed to capture more data about what people really wanted. So the sellers improved their call center performance, their web site analytics’ and the analysis of all the data captured from these interactions. Sellers became obsessed with capturing data of customer interactions at each touch-point while forgetting that a relationship was a journey not a sprint and the intangibles created more value than the tangibles.

Meanwhile internally sellers also became obsessed with capturing data from employee interactions with other employees, with customers and suppliers hoping to learn what can be done to improve productivity and quality of service.  Thrilled with the potential meaning of all this Big Data sellers began to believe they could again become smarter and thus increase productivity and profitability faster than ever before.

Meanwhile the human network watched in disbelief as the so called smarter sellers continued in their folly ignoring the wisdom of the crowds and the voice of the people they claim to serve.

Many are simply not able to see the forest for the trees because of their smarts.

When short term results fall short of expectations we tend to adjust short term efforts to fix the short term results. Subsequently we get stuck in short term cycles of chasing the wrong result.

You can see this behavior across all markets and in any business regardless of size. Whether in public or private companies, large or small businesses in pursuit of revenue growth and profit are constantly reacting to results. The reactions vary from the joy of achievement to frustration and disappointment in not knowing why the results are not what was expected.  When the results aren’t what was expected everyone knows what to expect. A tribunal ritual of questions seeking answers to why the results aren’t as expected.

Subsequently when no one really has the answers everyone embarks on studies to insure their numbers are good and if they aren’t they seek ways to justify why they aren’t or people to blame for the failure.  The pattern of behavior repeats itself like an organizational addiction to dysfunctional thinking.

Results Are Driven By What?

As we all know there are lots of variables that influence an organization’s results. Most organizations attempt to measure and monitor the critical variables such as income, expenses, customer retention, satisfaction, sales, employee turnover and a host of other operating processes that influence results.  There are also changes in market conditions, competition and the fundamentals of economics which influence results. All of these variables can be categorized as human, strategic, structural and relationship variables which are all intangibles.

The very operating processes that management measures and monitors reflect the output of intangible capital. In other words customer retention and satisfaction is an output of relationship capital. Employee satisfaction and turnover is an output of human capital. The information and knowledge required to operate the related operating processes is structural capital and the purpose and identity of the organization in the marketplace is reflective of the strategic capital.

The intangibles come before the processes which come before the results. So until an organization measures its intangibles process improvement is limited and so are the opportunities to improve the results.

Unless you work on improving the intangibles (inputs) you’ll never really achieve the optimum results (outputs).

The 21st Century changes requires  reverse engineering in our thinking if we truly want to improve anything.

If you haven’t noticed everything seems to be in a continuous state of transformation. From business, politics, economics, social issues and what we define as meaningful, everyone seems to be rethinking everything.

This constant state of transformation has become the norm rather than the exception and we not only come to expect it but to enable and create it ourselves. Empowered by technology we can beg, borrow and steal ideas from others and apply similar thinking to our own causes, businesses or personal situations.  Access to the abundance of Human Capital is no longer limited to corporations, demographics, education or economic status. The connectivity to the human network has accelerated the sharing of knowledge like never before. This acceleration is powering the learning curve and the human network is learning to unlearn in order to discover to what we need to learn for the 21st century.

What We Need To Unlearn

The Industrial Era needed human labor to work with machines for the purposes of mass producing things in order to meet the increased demand for mass consumption. Schools produced students with knowledge and skills needed to fill the jobs produced during the growth of the Industrial Era.   Supply simply followed demand.  Now this is no longer true, the demands have changed, the human supply is demanding a change and technology is creating more change.

Seth Godin writes in “The Icarus Deception: How High Will You Fly?”:  The economy has rescinded the simple offer of “Do what you’re told, play it safe, and you can make a living.” Making a living is now harder than ever. The alternatives are up to you.  We’ve been trained to prefer being right to learning something, to prefer passing the test to making a difference, and most of all, to prefer fitting in with the right people, the people with economic power. Now it’s your turn to stand up and stand out.

We are living in an Era of Transformation where old rules are being challenged and new rules are being made. Once something is transformed, it never goes back to being the way it was before because transformation harnesses the power of human creativity. Human creativity has been awakened by the possibility of what it can do together with others without the constraint of old rules governed by old mental models of the past.

We know not what will be on the other side of the Era of Transformation but we have faith in the belief that it will be much better than the era that preceded it because we have the Human Capital to make it so..