When it comes to building successful businesses there are number key strategic areas that need to be considered. They are: 1. Your intellectual property protection, 2. Your overall business model, 3. Your rapid global rollout, and 4. A uniform approach to licensing and criteria for selecting country distributors.
From a strategic planning standpoint the five pillars for building a company are 1. A platform of superb products that are building on a current marketplace trend, 2. Intellectual property protection and proprietary know-how that competitors cannot access, 3. Focus on low-cost manufacturing right from product launch as if you are successful, competitors will soon follow, 4. Build your own brand in every relevant category because as product and patents mature you need to sustain your advantaged position, 5. Have great human capital systems that help people be great at what they do.
To incorporate into strategic business plans a better utilization of the business’ complementary assets, intellectual assets or intellectual capital a useful model developed by a group called the Gathering is hepful. In the “Tangible-Intangible Model of a Company” figure we see a model of a company as viewed from an intellectual property viewpoint.
Models and corporations come in many sizes and shapes. Sometimes we think that a corporation is its corporate headquarters and buildings that it owns around the world. Other times we look at a company in view of its organization chart with the CEO at the top of a tree. Other times we look at corporation through an accountant’s eyes and look at the corporation from a cash flow and balance sheet standpoint. The model of “Tangible-Intangible Model of a Company” figure is no different. It is just one other view of a corporation.
In this model we see that the structural capital comprises the generic assets of the company which are non-distinctive compared to other competitor companies. These are typically plants, property, and equipment, and access to investment that any and all companies have. It is not something that makes one company different from another. Resting on the base of structural capital we see to the right there are complementary business assets. These are the differentiated assets that make one company and industry different from one another. It might be the quality of the sales force. It might be how the sales force was trained and the type of relationships they build. Differentiation can also be based on the distribution capabilities of a company. One company may be using direct sales, another company internet sales, and a third going through large wholesalers. Factory facilities are another common point of differentiation. One company may be opening its own plant and putting together its own processes in a unique way to deliver value to customers. Another company may be outsourcing its manufacturing entirely. Another form of differentiation has to do with the type of standards that exist within an industry. To the extent a company can influence government or industry standards, i.e. the FAA in the case U.S. airplane regulations or Underwriters Laboratories in the case of electrical components, these standards and having the standards closely aligned to a company’s product design becomes another source of differentiation and competitiveness.
The third asset class of a company, and the one that is most unique and hardest to copy, is intellectual capital. A sub-class of Intellectual Capital is Human Capital. This is comprised of the individuals who are part of a company. Each person brings his or her own unique background to work and this is a point of leverage for corporation that other companies can’t acquire. Other things that are difficult for other companies to acquire are the heritage capital and artifacts that lie around the company. These can be the stories of how the company was built, the passion with which people pursue customers, the importance of quality to success, the importance of innovation to everybody. These stories are a way of doing things. They are not easily transferable from one company to the next.
Another sub-class of intellectual capital is intellectual assets. These assets are comprised of patents, copyrights, trade secrets, trademarks, and know-how (which although is not legally protected as an asset itself, an intellectual asset that is nonetheless unique and very difficult to transfer from one corporation to another). What’s important is that when a company is successful, it has taken the unique intellectual capital assets that it has and created a business model, or way of doing business, that takes maximum advantage of the differentiated business assets it possesses. For example, the way it employs its human capital matches the way in which the sales force is trained and operates. The patents that it has supports the way in which manufacturing is done. Trademarks support the branding that the sales force is known for. With this model as a backdrop will now look at how strategic planning might be done in four kinds of corporations.
The first example is shown in the “Tangible-Intangible Model of a Beverage Company” figure. This business model is typical of Coca-Cola or Pepsi-Cola in the early 1990s. The line running through the chart shows where value is added and created for a corporation. We know the big jumps are for trademarks, trade secrets, distribution capabilities and the sales force. This makes sense when you think of the traditional Coca-Cola’s formula being a trade secret and its method for going to market is selling concentrated syrups to distributors around the world who bottle that secret formula by adding water and then distributed it into the local market. What was essential for success were trademarks and trade secrets. Coca-Cola’s trademark is one of the most valuable in the world and the value of its trade secrets formula is also well-known.
What’s important for strategic planning is how to utilize this model of a company to plan better. Insight from this model and example suggests that incremental work can be done on improving business methods for selling and distribution and then next-generation or breakthrough work could be done on the manufacturing facility of the syrup itself or in government or industry standards around soft drinks in general. Likewise, innovation from a strategic planning standpoint could switch from the emphasis on trade secrets and trademarks to that of patents and copyrights. Indeed if one looks at large beverage companies today, one notices they have changed their business strategy. Instead of having few patents they have built portfolios of many, and they are focused on dispensing equipment in both large and small facilities. Pictures such as this one provide an important way to understand a company’s strengths and how these strengths must shift together to make up a new way of successfully doing business.
In contrast to a beverage company, the model for a capital-intensive paper products company is shown in the “Tangible-Intangible Model of a Paper Company” figure. Here the line running through the chart showing where value is created has a much different shape. For large paper companies creating communications paper or towel and tissue, much of the distinctiveness is created by how the market perceives equality and price point of their product. The salesforce’s ability to leverage the branding that marketing has created is a key element in creating value in this environment. Intellectual property to protect this distinctiveness lies in trademarks, as seen in the figure. Notice that the amount of intellectual property protecting the manufacturing facilities is modest. Most of the protection of the manufacturing facilities from competition lies in the fact that these facilities cost hundreds of millions of dollars to put in place. Upgrades the equipment have modest intellectual property in the form of patenting of the head box design (which lays the paper fibers down) or though the felting which carries those fibers through the drying process. Even though these machines are automate, significant operator know how is still required (especially when one knows that storm fronts are approaching which will change the pressure, temperature and humidity in the plant significantly). Such operator know how is required to keep a plant running smoothly through such upsets. It is critically important to sustain profitability and low waste in an industry that has typically low margins. Strategic planning in this area would give emphasis to improving the branding and improving small elements of design of the paper machine.
A contrasting example of where to plan for business growth is shown for a software company in the “Tangible-Intangible Model of a Software Company” figure. Distinctiveness for software often comes from capturing government or more importantly industry standards, along with forms of distribution by either Internet or an ASP model. The most important form of Intellectual Capital is trademarks and copyrights along with know-how.
Name recognition in selling is also important. From a strategic planning standpoint resources therefore should be on building the trademark, having copyrighted protection of the software itself, as well as hiring a skilled pool of software programmers. We see in this example, by segmenting a business by its intellectual capital, complementary business assets, and structural capital gives us insight as to how to go about strategic planning for new software companies who are just starting to build up their product line or service line offerings.
The last example we’re going to look at for business strategic planning is a traditional pharmaceutical company. Their distribution of assets is shown in the “Tangible-Intangible Model of a Pharmaceutical Company” figure.
Pharmaceutical companies are built on the creativity of scientists in chemistry and biology. The need for creative human capital is shown on the left side of the “Tangible-Intangible Model of a Pharmaceutical Company” figure. These companies protect that work through patents and increasingly by their trademarks as they create and promote in television and on-line advertising. There is also some know-how associated with the management of a pharmaceutical pipeline. Clearly complementary business assets include understanding of the government standards associated with delivering pharmaceutical products to the market, as well as having a sales force and marketing organization capable of promoting the product to physicians and end-use customers alike. Again looking at incremental innovation projects in this area one knows that the returns coming from inventing new drug entities is going to be much higher than that associated with improving manufacturing or distribution capabilities.
For breakthrough innovation planning, focus is on the opportunity existing in the flat areas of curves, i.e. like in the “Tangible-Intangible Model of a Pharmaceutical Company” figure for manufacturing and distribution capabilities. Disruptive work in these areas started in the early 2000’s by the outsourcing of pharmaceutical products to India and by distributing products not only to pharmacists but to go about marketing the products directly to end-users and working hard to get the products available on-line.
Strategic business planning to fill in the biggest gap is actually less about business planning and more about just being aware that the gap exists. Planning projects at this level is usually not productive. If any planning is to be done is usually associated with the perspective that the senior team possesses: the values of the company, the way in which people are motivated, and the way people are given the freedom to work on new ideas. Attempts to try and quantify this have met with limited success. The book “Built to last, successful habits of visionary companies”, by Jim Collins, HarperCollins publishers,2002, is one example. James follow-on book “Good to great”, HarperCollins publishers, 2001, talks about the Level 5 leadership required to make the transition. These elements of managing people and a growth environment are discussed in the human resources section later. Another good book on this topic is “The Innovator’s Dilemma: The Revolutionary Book that Will Change the Way You Do Business” (Collins Business Essentials) by Clayton M. Christensen (Paperback – Jul 25, 2006). It discusses how to go about planning for breakthrough growth.