There Are Asset & Then There Are Assets: Not All Assets Are Equal

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From an accounting view, a business has many asset. Some assets are even off the books, like the value of a brand. I think you would agree if I said a trademark registration costs $600 (in the US it does) which you mould find classified as an intangible asset on the balance sheet. However, the value of the brand may be much, much more than that yet that value is not on the balance sheet. Even if I were to buy a company that owns the brand, in consolidation I would only record the $600 trademark and put the rest of the brand value in Goodwill.

Still using your Coke company example, the key component was the secret formula. It wasn’t written down on any balance sheet and was a trade secret. To my knowledge no patent was ever filed for the Coke formula. And yet, without the formula you wouldn’t have Coke.

So accounting does not help us to understand what we mean by a key component. You understand this I am sure.

This why when I wrote the book last year I described the key component as an asset the company owns and/or controls with which nothing else is possible. Without the coke formula you have no need for any of the other assets, any or the processes, any trademark, and so on. This formula was the basis for everything that came afterwards. Just like in the book, I explain that the optical pickup is the key component for the CD player because without it you cannot read the disc making the whole device, the whole system even, useless. However, the markets for optical pickups is not limited to CD player but extends into other products: DVD players, BlueRay players, and so on (optical medium).

This is where markets become an important factor in the equation. An iPod player uses completely different technology making the optical pickup obsolete in that audio and video market. In other words, the optical pickup does not reduce the risk of reading the content stored in an iPod because it just doesn’t work there. That said, there are still plenty of markets that use CDs, DVDs, and BlueRay discs. In the rich western countries almost all the optical medium market is gone even though some still exists but in emerging markets and poorer markets it is a stable or growing market. Unless many consumers have smartphones in which to store their audio and video content in which case the market is surly migrating there. Back in the day, Apple prematurely launched the iPhone as a way of protecting its iPod market for this same reason.

Getting back to the Coke example. The machines are part of the processes that allow the company to make its key component available to customers. In the same way, marketing is a process to make the key component available to customers. So yes, there are plenty of assets on the books and most of them are simply process related. So if as a business owner I am forced to acquire all this machinery that is process related just to get a return on my key component I need a lot of money to invest. Why not use someone else’s assets for whom my process assets are their key component? Thus, coke developed the bottling plant system where they went around the world searching for companies who were bottling beverages for other companies and sold them a license to bottle Coke. For these bottlers the demand for Coke was so high that they maximized the return on their key component. Understand?

More recently, we read about flat companies. What exactly does that mean? Simply, each company is specialized with their own key component selling access to it to their customers. All the participants in the value chain are then held together through an IT system that uses a common protocol known as the Internet Protocol.

This form or economic organization greatly increases productivity as we see in the US statistics but not in the European ones. Why is this you may ask? Many have argued that US productivity gains came from the computer but almost everyone in the world has a computer nowadays and they don’t have such gains because the US has advantageous laws, easy access to capital and an appetite for risk you don’t find elsewhere. Consequently, there are certain products and services you will find a ready market for in the US but not elsewhere. In other words, because the product or service is not useful in that market it cannot be considered a key component.

I hope this is clearer for you, Peter.


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