I am currently reading a fantastic book titled Capitalism without Capital: The Rise of The Intangible Economy by Jonathan Haskel and Stian Westlake. The essential message of the book is how the "new" economy allows companies to get to hyperscale size because they are built on intangibles (software and ideas). These are infinitely scalable and have allowed the growth of FAANG (Facebook, Apple, Amazon, Netflix, Google ) to incredible levels. Because this is a supply chain blog, I will focus on what this means for everyone else relative to Amazon.
People constantly ask the question: How can Amazon keep growing if they do not make money? There are two answers: First, Amazon has proved that if they want to scale back investment they can make a lot of money almost at will. Just in Q2 of this year they made over $2bl in profit in one quarter. Not bad for a company that "does not make any money". Second, and this is the most important point, they have built this profit machine on the value of intangibles.
Most companies value themselves based on what can physically be put on the balance sheet. Something is an "asset" if it is physical in nature and can be valued in the marketplace, mostly by figuring out its resale value. Further, accounting rules actually favor this as when you put this "asset" on the books you do not have to expense it all at once but rather depreciate it over time. This makes a physical good more valuable than an intangible good.
However in the intangible economy where it is intangibles which truly drive value this is a real problem. Think of it this way: What makes Amazon's supply chain so great? It certainly is not the buildings, racks, trucks or even the Kiva robots. All of those are easily replicable. Rather, it is the intangible assets which make it great and where they have invested a lot. It is the algorithms, the engineering solutions, the supply chain processes (inventory, order management and advanced delivery routing) which add all of the distinctive value of Amazon. So now we can answer the question: Why doesn't everyone just replicate Amazon?
Because their rigid and outdating accounting systems won't let them.
While others are looking to physical assets which can be depreciated and can easily be valued for ROI purposes Amazon looks to the intangibles. By doing this Amazon has built a cash machine which now allows them to put up physical assets with ease.
The basic tenet of the book is companies which value their intangible assets have infinite scale. Once they get to this point it is tough for anyone to catch up.
Friday, September 28, 2018
I hope to connect with a lot of colleagues and meet new ones as we head to Nashville for the CSCMP Edge 2018 meeting. For those who are new in the industry, this is the premiere event and the "must go" event for the year. As I reflect on why I try to go every year, I think about the following:
- Thought Leadership: The people who are setting the trends are here and they are happy to engage with you. Just by attending sessions, listening deeply and interacting with the industry leaders I get to think about issues, how others have solved them, where the supply chain industry is going and, most importantly, what our customers (of our products) need from the supply chain.
- Connection: The ability to connect with colleagues whom I have worked with or known for the better part of 30 years. The supply chain industry is a community and you must engage in it. One of my key recommendations to those who are starting out in the industry is the need to engage with colleagues. Think of it as your own personal "crowd sourcing". This is where you get this done in the span of 4 days.
- Sharpen the Saw: I really try to "get away", disconnect and that allows me to deeply engage in the conference. I work hard not to jump on my cell phone, do email etc. My feeling is if your organization cannot run for 4 days without your constant interaction then that is a signal there is a real problem with the organization. So, I encourage everyone to engage.
I was lucky enough to be the conference chair in Denver a few years ago and also serve on the board of this great institution.
Look forward to seeing you all there!