Physical Assets Losing Value In New Business Strategies

What is an airline? Thats easy, you might think. But listen to this definition from Rajat Gupta, head of the global consulting firm McKinsey. An airline, according to him, is a company that has a reservation system, data bases on traffic patterns, landing rights and brands. The physical assets and many of the operational aspects will belong to others and will be outsourced. In short, an airline may be a company with neither planes nor flying crew.

Or, how would you operate in the field of personal financial services, Gupta asked. Most people would think of large, full-service banks. But, he said, credit card processing had become a business worth $300 billion, and this could soon be $600 billion. If you create a global silver like that, your business will be worth more than that of a bank which has $600 billion in physical assets, he declared.

 

Gupta was taking part in a discussion at the annual meeting of the World Economic Forum on strategies for the 21st century. His point was that the way business is conducted will see sweeping changes in the next century, and that the economics of companies will be fundamentally different.

Old businesses will have to be looked at in new ways, and business boundaries will have to be re-defined. Also, the traditional role of intermediaries will disappear.

Much of the change, according to Gupta, will be driven by the growing importance of intangible assets and the dramatic drop in interaction costs.

Bill Gates of Microsoft on his part said the rules of the business game were being changed by advances in information technology. Companies would become smaller because they would outsource more, and a firm could become a digital nervous system where people can log into information company-wide, removing the need for much paperwork, making business trends more visible, and providing more detailed knowledge of customers.

Kim Bryce Clark, dean of the Harvard Business School, argued that the modular principle would be extended from production lines and product use (as in furniture) to the design process, and this would create enormous value because complex tasks could be broken up and then tackled. He said this would change the dynamics of enterprises, and indeed this would be central to business strategy because it would influence the ability to tap new markets and new opportunities.

Enterprise design, he therefore argued, would be central to business strategy.

Gupta took this argument a step forward and said that there would be a break in the trade-off between managerial control and organisational entrepreneurship, and indeed that the line between the external market and the internal organisation would disappear. The result, he said, would be not organisations but configurations.

Gupta argued that the changes under way would create the need for a new framework for valuing companies. In addition to looking at the net present value of assets and the value of growth opportunities, companies would also have to assess the new options they had and the flexibility with which they could pursue these options.

The strategic freedom is frightening, he said. The challenge was to design organisations so that the freedom within a company gives it freedom in the market.