4 posts tagged with "business model"

Running a business can be like playing an infinite game in which there is no final score to determine the ultimate winner. So the main goal for each participant is to stay in the game as long as possible. Nowadays, too many people analyze businesses based on their stock prices. It seems that they forget one point: high profits at one time may collapse to zero overnight if the business cannot sustain.

To create businesses that last for generations, we should get back to long-term thinking and focus on making products people want instead of striving for short-term revenue. Simon Sinek, the author of The Infinite Game, introduces how to equip your business with the infinite mindset.

Start with a Just Cause​

As Adam Smith put in the book The Wealth of Nations, the interests of consumers should come before the interests of the company. However, in 1970, Milton Friedman published an article writing that the primary responsibility of any free-market enterprise is to make money for shareholders, which signals a shift from being consumer-centric to being shareholder-centric.

A Just Cause is an inspirational goal that encourages your employees to fight for. If companies strive for longevity in the Infinite Game, their goals need to be consumer-centric. If they do not follow this principle, take the GPS device company Garmin, for example. It claimed to be “the global leader in every market we serve” and mentions nothing about their customers in the vision. Then no wonder why it is only worth one-third of its value in 2007.

Build trusting teams​

A company culture of distrust is fatal to business operations. If employees do not trust the company, poor performance, or even unethical behaviors may take place. And this is due to the simple reason that employees don’t know whether to speak up honestly when something unpleasant happens.

Such is the case of Ford Motor Company before the year 2006. The CEO at that time had a habit of blaming and even firing those who brought bad news to him. And then, gradually, employees only reported good news on meetings. The culture of distrust was turned around only after Alan Mulally became the new CEO, who took actions to encourage everyone to bring up bad news.

Be flexible and learn from worthy rivals​

Whether in the sports field or the business world, a good opponent forces you to improve yourself and learn new techniques. When Allan Mulally became the CEO of Ford Motor Company, Ford had lost 25 percent market share over the past 15 years. Instead of adopting promotion strategies, Allan turned to study rivals like Toyota and Lexus, trying to figure out why consumers preferred those cars over Ford.

It is the same case with Steve Jobs. He changed Apple’s plans instantly when seeing Xerox working on the GUI technology and decided to implement this new technology on Apple’s new computers. Now you can see how successful that move is. And this cannot happen if Jobs cannot embrace new technologies with his flexibility and fast execution.

Running a business can be an infinite game, with no final score to determine who wins or loses. The ultimate goal of a company is to stay in this game for as long as possible. Too many people today are accustomed to using stock prices to judge a company's performance, but they overlook one crucial point: if the business is not sustainable, a temporary stock price can vanish overnight. To create a sustainable enterprise, we need to refocus on how to innovate and create products that people need, rather than just generating more wealth for shareholders. Simon Sinek, in The Infinite Game, proposes that companies should establish a just mission, build teams based on mutual trust, embrace change, and learn from worthy competitors to gain an advantage in the game.

Establish Long-Term Goals​

Adam Smith advocated in The Wealth of Nations that businesses should prioritize consumer interests. However, by 1970, Milton Friedman argued that a company's primary responsibility is to generate profits for its shareholders. This marked a shift in business goals from being consumer-centric to focusing on short-term profits and growth.

A lofty goal should be inspiring and motivate people to strive towards it. If businesses want to operate for the long term, their goals should revolve around consumer needs rather than merely pursuing profit. GPS device manufacturer Garmin once claimed its goal was to be the leader in every market it participated in, without mentioning customers at all. It’s no surprise that its current market value is only one-third of what it was in 2007.

Build Teams Based on Mutual Trust​

A culture of distrust within a company can be fatal to its operations. If employees do not trust the company, their performance will decline, and they may resort to unethical business practices. The root cause of this often lies in employees not knowing whether they should be honest when faced with uncertain situations.

This was precisely the case at Ford Motor Company before 2006. The then-CEO had a habit of reprimanding or even firing those who brought him bad news. Naturally, employees would only share good news in meetings. It wasn’t until Alan Mulally took over and encouraged everyone to report bad news that the culture of distrust began to change.

Embrace Change and Learn from Worthy Competitors​

Whether in sports or business, a good competitor can push you to improve your skills and learn new ones. Learning from competitors can help a business go further. When Alan Mulally first became CEO of Ford, the company had lost 25% of its market share over the past fifteen years. However, Mulally did not rush to launch promotions or cut costs; instead, he began studying competitors, including Toyota and Lexus, to understand why consumers preferred those vehicles.

Similarly, when Steve Jobs discovered the GUI technology being developed by Xerox, he immediately changed Apple’s original plans and decided to implement this technology in the new computers. Today, the widespread use of GUI validates Jobs' successful decision. If Jobs had not embraced new technology with the right mindset and execution, these transformations would not have occurred.

For centuries, our economy has revolved around physical assets. With technological advancements, the modern economic landscape has changed, and the most significant investments and assets are increasingly occurring and existing in non-physical forms.

The highest-valued companies, including Facebook, have their core assets in intangible assets such as software, branding, and development capabilities, rather than real estate or factories. Companies built on intangible assets operate differently from those relying on physical assets due to certain characteristics. From the book "Capitalism without Capital," we summarize the three key characteristics of intangible assets.

1. Rapid Scalability​

Businesses that rely on physical assets share a common drawback — they are easily constrained. When we need more production capacity, we must invest in acquiring more physical assets. In contrast, intangible assets are not subject to such limitations, allowing for rapid expansion in a short period. The scalability of intangible assets is particularly evident in the tech industry. For instance, the development of a software application can often lead to millions of downloads. This means that an increasing number of intangible asset-intensive companies can grow to astonishingly large scales.

However, this rapid scalability also brings the possibility of monopolies, posing significant challenges for new companies entering the market.

2. High Risk and Irrecoverability​

Physical assets tend to outperform intangible assets in terms of value stability. Even if physical assets depreciate, they are unlikely to be completely unwanted at the time of sale, whereas intangible assets are different. Intangible assets are difficult to quantify and cannot be recovered once issues arise, becoming sunk costs that investors have already incurred and cannot reclaim.

Brands do not have mature markets: on one hand, because brand value is hard to assess; on the other hand, a company's failure often leads to the complete disappearance of its brand value. Therefore, if a company relying on intangible assets fails, all previous investments will be lost. In reality, intangible investments carry extremely high risks and can vanish overnight.

3. Ease of Replication​

Intangible assets are generally easier to replicate than physical assets, making them susceptible to theft by competitors; they can be an idea or a concept. Thus, when a tech company creatively solves a problem, a surge of imitators and competitors typically follows. The iPhone is a prime example. To capture a larger market share, competitors often continuously engage in technological improvements and further innovations.

The ease of replication also brings issues of abuse and plagiarism. Policymakers in the intangible economy need to strengthen robust protection of intellectual property to ensure that innovators are not discouraged.

Over the past centuries, our economy has always revolved around physical assets. However, due to the development of technologies, the forms of the modern economy have changed drastically, and investments and assets in increasing numbers become non-physical, namely, intangible.

Nowadays, many of the most prominent companies in the world, such as Facebook, possess a significant amount of intangible assets, including software, branding, and development capacity, instead of real estate or factories. Companies built with intangible assets, for some reason, behave differently from those reliant on physical assets. The book Capitalism without Capital introduces three main characteristics of intangible assets.

1. Intangible assets can expand rapidly​

Businesses based on physical assets have one disadvantage in common: they are easy to be limited. When we need more production capacity, we have to invest more tangible assets. However, intangible assets do not have such limits, and they can expand rapidly in no time, which is particularly evident in the tech industry. For example, one mobile app can attract millions of downloads.

Intangible-intensive companies can likely grow incredibly large and finally become monopolies, creating enormous challenges to new entrants in the same industry.

2. Intangible assets are high-risk and irrecoverable investments​

Physical assets are relatively more stable than intangible assets in terms of value. Although physical assets may depreciate, they can always find a buyer in the market at a lower price. The case of intangible assets is a bit complicated. It’s hard to calculate the investments in intangible assets and recover the costs if anything goes wrong.

There is no mature secondary market for brands: on the one hand, the brand value is difficult to estimate; on the other hand, the brand may lose all the value if the business fails. Therefore, intangible assets are high-risk investments and may drop to zero overnight.

3. Intangible assets are easy to be duplicated​

Your competitors can steal your intangible assets with little difficulties. When a tech company solves a problem innovatively, many imitators and competitors spring up. iPhone is a good example. And in order to obtain a larger market share, competitors always keep improving the current technology and try to innovate further.

However, being easy to be duplicated brings up a problem of abuse. Policymakers in the intangible economy should enhance the protection of intellectual property rights.