• by Gord Hotchkiss , Featured Contributor, September 25, 2014

Something strange is happening to companies. More and more, their business is being conducted in non-physical markets. Businesses used to produce stuff. Now, they produce ideas.

A recent op-ed piece from Wharton speculated that companies are working their way up Maslow’s Hierarchy. The traditional business produced things that met the needs of the lowest levels of the pyramid: shelter, food, warmth, security. As consumerism spread, companies worked their way up to next levels: entertainment, attainment and enjoyment.  Now, the things that companies sell sit at the top of the pyramid: fulfillment, creativity, self-actualization.

The post also talks about another significant shift that’s happening on the balance sheets of corporate America. Not only are the things that corporations sell changing, but the things that make up the value of the company itself are also changing.  According to research by Ocean Tomo, a merchant bank that specializes in intellectual property, the asset mix of companies has shifted dramatically in the past 40 years. In 1975, tangible assets (buildings, land, equipment, inventory) made up 83% of the market value of the S&P 500 companies. By 2010, that had flipped. Intangible assets (patents, trademarks, goodwill and brand) made up 80% of the market value of the S & P 500.

Chains vs Networks and the Removal of Friction

Barry Libert, Jerry Wind and Megan Beck Finley, the authors of the Wharton piece, focus mainly on the financial aspects of this shift. They point out that general accounting principles (GAAP) are quickly falling behind this corporate evolution. For example, employees are still classified as an expense, rather than an asset.

I’m personally more interested in what this shift means for the very structure of a corporation. If you built stuff, you needed a supply chain. Vertical integration was the way to remove physical transactional friction from the manufacturing process. Vertical integration bred hierarchal management styles. Over time, technology would remove some of the friction. and some parts of the chain might evolve into open markets. The automotive industry is a good example. Many of the components of your 2015 Fusion are supplied to Ford by independent vendors. Despite this, makers of “stuff” still want to control the entire chain through centralized management.

But if you sell ideas, you need to have a network. Intangible products don’t have any physical friction, so supply chains are not required. And if you try to control a network with a centralized hierarchy, branches of your network soon wither and die.

The New Real Thing

Coke has not been a maker of stuff for quite some time now. Sure, the company makes beverages, so technically it's quenching our thirst, but the true value of Coke lies in its brand and our connection to that brand. The “Real Thing” is, ironically and quite literally, a figment of our imagination. If you were to place Coke on Maslow’s Hierarchy, it wouldn’t sit on the bottom level (physiological) but on the third (love/belonging) or even the fourth (esteem).

Coke is very aware of its personal connection with its customers and the intangibles that come with this. That’s why the Coca-Cola Freestyle Vending Machine comes with the marketing tag line: “So many options. Thirst isn’t one of them.” You can customize your own formulation from over 100 choices, and if you have the Freestyle app, you can reorder your brand at any Coke Freestyle machine in the world. Of course, Coke is quietly gathering all this customer data that’s generated, including consumption patterns and regional preferences. Again, this intimate customer insight is just one of the intangibles that is becoming increasing valuable.

Coke is not only changing how it distributes its product. It’s also grappling with changing its very structure. In a recent conversation I had with CMO Joe Tripodi, he talked a lot about Coke’s move towards becoming a networked corporation. Essentially, Coke wants to make sure that worldwide innovation isn’t choked off by commands coming from Atlanta.

The Turning Point of Capitalism

As corporate America moves away from the making of physical stuff and toward the creation of concepts that it shares with customers, what does that mean for capital markets?  In his new book "The Zero Marginal Cost Society," Jeremy Rifkin contends that capitalism is dying a slow death. Eventually, it will be replaced by a new collaborative common market made possible by the increasing shrinkage of marginal costs. As we move from the physical to the metaphysical, the cost of producing consumable services or digital concept-based products (books, music, video, software) drops dramatically. Capital was required to overcome physical transactional friction. If that friction disappears, so does the need for capital.   Rifkin doesn’t believe the death of capitalism will be any time soon, but he does see an inevitable trend towards a new type of market he calls the Collaborative Commons.

Get Intimate

My last takeaway is this: If future business depends on connecting with customers and their conceptual needs, it becomes essential to know those customers on a deeply intimate level.  Throw away any preconceptions from the days of mass marketing and start thinking about how to connect with the “Market of One.”