A company is a social arrangement codified in law and directed towards a purpose.
Increasingly, the largest, most profitable, and successful companies have few tangible assets. Patents are rarely enforceable outside of select industries like pharmaceuticals. Companies that relied on copyright like the music industry have shrunk to a fraction of their former size. Manufacturing has been increasingly outsourced. More workers perform their jobs from home than ever before.
Many companies consider that most of their strength comes from their brand. But traditional branding has come under criticism. It used to be possible to label a commodity like potato chips with a brand name strengthened by television, print, and radio advertising and mark up the products considerably. Generating that brand strength is no longer as easy as it used to be. And it’s impossible to measure.
Apple, for example, used to have an anemic brand. Since Steve Jobs returned to the company in 1997, it built arguably the strongest brand in the business by aggressively marketing consumer electronics, software, and computer hardware as a fashion statement. Apple products became an expression of a lifestyle, of a certain sensibility. What used to be a market dominated by hyper-masculine power comparisons – computers used to be advertised in terms of processor speed – became more driven by conventional advertising. When the iPod came out, it was technically inferior and more expensive than most other MP3 players on the market.
Because Apple told a more compelling story and offered excellent technology with a more intuitive user interface, they broke consumer electronics out of the overwhelmingly male gadget-worshiping niche.
The strength of a brand is not necessarily to the benefit of a business or person. Lindsay Lohan, for example, has a very recognizable brand. Despite this, she has trouble finding high-paying work. Her name has negative connotations now. Her legal troubles make her expensive for production companies to insure her. Her brand has become more of a liability than an asset to most who would choose to work with her.
Brand equity connotates a set of beliefs and associations surrounding a company or product line that predisposes people to pay for products or services. Even tiny companies develop brand equity. Flat Rate, a relatively new moving company, has generated a powerful brand in recent years by introducing transparency to the pricing process.
Something that’s been overlooked in an outsourcing-obsessed era is corporate culture. Because it’s impossible to define on a balance sheet, many executives and managers have received inappropriate incentives. High-functioning companies inculcate a culture of mutual respect among employees. Those that tend to whither quickly accept abusive practices, fail to maintain clear standards of behavior, are indifferent to customer service, and paranoid about employees speaking with the general public.
People work better if they’re respected and properly rewarded. An inappropriate focus on short-term profits by forcing higher production from employees at the cost of employee happiness has negative long term effects. In a world in which machines and other forms of capital equipment (the tools that workers use to produce) are increasingly inexpensive, the employees are the primary means of production. Treating workers with respect is investing in the future of the company.
Corporate culture is also extremely fragile. If a manager becomes embroiled in a scandal, the negative morale effects can ripple through a company. Such an event can impact corporate productivity just as much as a factory accident.
Certain companies are specially privileged by legislation or directly operated by the government. Most telecommunications companies own a particular portion of spectrum or the rights to run cables through particular areas of land. Ratings agencies like Moody’s and Standard & Poor’s have a shared legal duopoly on rating bonds. Car insurance companies benefit from state mandates for all drivers to use insurance.
There are also natural advantages, like those offered by geography. A mining company owns exclusive rights to extract ore from a particular area. A retailer that owns an outlet on Times Square has a similar advantage.
Companies can also derive value from contracts. A shipping company, for example, derives much of its value from various contracts with importers, exporters, and fuel suppliers.
Why Does This Matter?
It matters because the corporate world is changing rapidly. Whether due to social movements, economic shifts, the stock market, regulatory issues, or other problems, many major corporations are suffering to a degree without recent precedent. The costs of product development, production, and distribution have been driven down relentlessly. Companies are firing workers, increasing outsourcing, and experiencing unexpected disruption from tiny upstarts.
To create meaningful companies, we need to come up with competitive advantages. We have to deal with reality as it is rather than how we would like it to be. Wishful thinking may alleviate anxiety, but it never solves problems.
As many have learned in recent years, the attractiveness of a balance sheet or the opinions of stock analysts are often no indicator of future success.
The best companies are societies dedicated to advancing the human condition. It’s imperative that we cultivate them.