Intangibles and start-ups

Another oldie but goodie. I found this 2005 interview on start-ups and intangibles — How Can Start Ups Grow? — HBS Working Knowledge:

Assistant professor Mukti Khaire believes that small companies can grow by developing intangible social resources such as legitimacy, status, and reputation. In an interesting twist, her research on this insight is that these intangible resources may be best acquired by following a road of conformity in how your company is organized and presented to the outside world. In start-ups in established industries, conventional business titles such as Marketing Director work better than novel ones like Chief Evangelist.
. . .
Q: Can you tell us about the concept of intangible social resources and how they contribute to a young firm’s growth? How does a firm acquire non-tangible resources such as reputation and status?
A: Intangible resources are non-financial, non-material assets that a firm possesses by virtue of the social structure in which it is embedded. Although firms are economic entities, they are nevertheless affected by social variables such as legitimacy, status, and reputation because all economic transactions are embedded in a social supra-structure. Since most young firms are financially constrained, intangible assets that do not require outlays of financial resources are especially critical to new ventures.
An entity is considered to have legitimacy when its actions are considered proper, acceptable, or desirable under a widely accepted set of beliefs and norms. A new, unfamiliar activity or entity does not possess legitimacy because of its inherent novelty. A new firm, therefore, lacks legitimacy and may be looked upon with suspicion by stakeholders. In order to gain legitimacy, a new firm is required to look like existing organizations, which possess legitimacy because of their familiarity to observers. Hence, mimicry of existing organizations’ structures and activities to a certain extent is essential if new ventures wish to gain legitimacy. A new venture with legitimacy acquired in this manner is more likely to succeed because it then can channel its resources and energy towards its core activity, rather than towards establishing its propriety. By doing so, it can improve performance and grow faster than an organization that does not conform to industry norms. As one founder I interviewed put it, “Customers are used to doing things in a certain way [with established organizations], and if a new agency is too far and out, it will not do well.”
High-status organizations tend to be buffered from environmental shocks and more likely to survive adverse circumstances and perform better than low-status organizations. Organizational status is usually a function of size and good past performance. However, young firms possess neither large size nor a track record of good performance. Although the benefits of status are crucial to their performance, they are unable to avail of them. An alternate way of acquiring status is through high-status affiliations. When a young, unknown firm has affiliations with high-status entities, stakeholders tend to impute the status of the latter onto the former, thus granting higher status to the young firm. I found that young agencies with high-status clients performed better and grew faster than agencies without high-status clients (controlling for the revenues brought in by each client). Thus, status acquired through affiliations provided young firms with the buffering advantage that larger, well-established firms enjoyed due to their status, and enabled them to compete in the same arena as much larger firms.

Bottom line: Status and legitimacy are key organizational intangible assets. I wonder how you measure that?

SOX and intangibles

Today’s Wall Street Journal is running a story about how Critics See Some Good From Sarbanes-Oxley:

But even critics acknowledge the law has done some good. “There is without question greater accountability in the boardroom,” says Thomas Lehner, an official of the Business Roundtable, a Washington group representing big-company CEOs. More boards resolve potential problems “before they fester and explode,” concurs John Olson, a senior partner at Gibson, Dunn & Crutcher who advises directors at about a dozen concerns.

What the story didn’t mention, however, is that SOX is forcing some companies to come to grips with their intangible assets. According to comments by Kimberly Klein Cauthorn at session “Intellectual Property and Intangible Assets: Growth of a New Asset Class” at the Milken Institute Global Conference 2007 (audio available), more companies are conducting audits of their intangibles as part of Sarbanes-Oxley compliance requirements.
To me, that is a big deal. If Sarbanes-Oxley ends up changing how the corporate culture deals with intangibles, it will be a major accomplishment just for that alone.

Valuing Global Brands

BusinessWeek has published its 2007 list of Best Global Brands. Toping the list of most valuable brands are Coke, Microsoft, IBM, GE, Nokia, Toyota, Intel, McDonalds, Disney and Mercedes-Benz. Google came in at number 20, Apple at 33 and Starbucks at 88. According to my calculation, the total value of the top 100 brands is over $1.5 trillion. The US brands are almost $745 billion.
The Business Week story highlights 5 comeback stories: Nintendo, Audi, HP, Burberry and Citibank. It also ranks the biggest gainers and losers:

A well rounded education

A new study from the Center on Education Policy Choices, Changes, and Challenges: Curriculum and Instruction in the NCLB Era is providing a new spark to the debate over the No Child Left Behind law. The study finds improvement in math and science scores, but at a price. The finds are as follows:

Increased time for tested subjects since 2002. About 62% of districts reported that they have increased time for English language arts1 (ELA) and/or math in elementary schools since school year 2001-02 (the year NCLB was enacted), and more than 20% reported increasing time for these subjects in middle school since then. Among districts that reported increasing time for ELA and math, the average increase in minutes per week since 2001-02 was substantial, amounting to a 46% increase in ELA, a 37% increase in math, and a 42% increase across the two subjects combined.
Reduced time for other subjects. To accommodate this increased time in ELA and math, 44% of districts reported cutting time from one or more other subjects or activities (social studies, science, art and music, physical education, lunch and/or recess) at the elementary level. Again, the decreases reported by these districts were relatively large, adding up to a total of 141 minutes per week across all of these subjects, on average, or nearly 30 minutes per day. These decreases represent an average reduction of 31% in the total instructional time devoted to these subjects since 2001-02.
Increases and decreases more prevalent in districts with schools identified for improvement. Greater proportions of districts with at least one school identified for NCLB improvement than of districts without schools in improvement reported that they have increased time for ELA and/or math at the elementary and middle school levels since school year 2001-02. Districts with at least one school in improvement also reported in greater proportions than districts without schools in improvement that they have decreased time in social studies, science, and art and music.
Greater emphasis on tested content and skills. Since 2001-02, most districts have changed their ELA and math curricula to put greater emphasis on the content and skills covered on the state tests used for NCLB. In elementary level reading, 84% of districts reported that they have changed their curriculum “somewhat” or “to a great extent” to put greater emphasis on tested content; in middle school ELA, 79% reported making this change, and in high school ELA, 76%. Similarly, in math, 81% of districts reported that they have changed their curriculum at the elementary and middle school level to emphasize tested content and skills, and 78% reported having done so at the high school level.

These findings raised concerns as to whether students are getting a well-rounded education. The report recommend the following:

Stagger testing requirements to include tests in other academic subjects. Because our survey data indicate that what is tested is what is taught, students should be tested in math and English language arts in grades 3, 5, and 7 and once in high school, and in social studies and science in grades 4, 6, and 8 and once in high school. These tests should be used for accountability purposes. By staggering the subjects tested, the total amount of NCLB-mandated testing would stay the same, except in states that do not currently test social studies in high school.
Encourage states to give adequate emphasis to art and music. States should review their curriculum guidelines to ensure that they encourage adequate attention to and time for art and music, and should consider including measures of knowledge and skills in art and music among the multiple measures used for NCLB accountability.
Require states to arrange for an independent review, at least once every three years, of their standards and assessments to ensure that they are of high quality and rigor. Because districts in our survey report that they are changing their curriculum to put more emphasis on content and skills covered on the tests used for accountability, states should be sure these tests are “good” tests by commissioning reviews of their standards and assessments by independent organizations or agencies.
Provide federal funds for research to determine the best ways to incorporate the teaching of reading and math skills into social studies and science. By integrating reading and math instruction into other core academic subjects, students will be more ensured of a rich, well-rounded curriculum. Funds should also be provided through Title I and Title II of NCLB to train teachers in using these techniques.

I hope the recommendations will be carefully reviewed in the process of reauthorizing the No Child Left Behind law. Math and reading are foundation skills – however at some point it is necessary to build upon that foundation. Otherwise, you end up with a massive cellar and little living space above. In the I-Cubed Economy, it is important to be able to do your sums and follow written instructions. That is the starting point. But those are industrial era skills. Creativity in numerous areas is the driver of prosperity today. If our schools are not fostering that creativity, then we are preparing our children for 1910, not 2010.

Dualing tax plans

The issue of taxes may be heating up in the Presidential race. Yesterday, Treasury Secretary Paulson teed up his proposals for corporate tax reform with a line up on mostly conservative luminaries, including Alan Greenspan (see Paulson Gets Support for Tax Overhaul – and my previous posting). The thrust of his ideas is a return to the 1986 deal of eliminating specific business tax incentives in return for a lower corporate tax rate.
On the other side, John Edwards unveiled his tax reform package that includes an increase in the capital gains tax rate (Edwards’s Tax Plan Focuses On Low, Middle-Income Families –, Edwards Proposes Raising Capital Gains Tax – New York Times and John Edwards for President-Building One Economy With Tax Reform To Reward Work).
Without getting into the specifics of either camp’s proposals, I would raise one very specific issue. If the I-Cubed Economy is fueled by development of intangible assets, how does your tax proposal foster or retard that development? Otherwise, you are just proposing a tax system for the past, not the future.

Knowledge intensive service activities

I recent ran across an OECD study (from last year) on Innovation and Knowledge-Intensive Service Activities:

From research and development to legal and marketing services, a wide range of knowledge-intensive service activities (KISAs) enables firms and public sector organisations to better innovate. KISAs are both sources and carriers of knowledge that influence and improve the performance of individual organisations, value chains and industry clusters across all sectors of the economy.

The study categorizes these services in four ways:

The case studies indicate that different types of KISA contribute in different ways to innovation (Table 0.1). Some KISA, such as R&D and strategic management, aid in firm renewal. Such renewal services are closely linked to innovation, but are relevant and accessible to a limited number of highly capable recipient organisations equipped with sufficient resources. Other, more routine services, such as accounting help maintain and improve existing systems and activities within organisations. Their significance for performance enhancement is highly important for most organisations. Compliance services, such as auditing and some legal services are not obviously linked with innovation, except to the extent that compliance with regulations related to health, safety, environment, etc., can stimulate innovation. Such KISA also offer an access route by which a wide range of organisations, among them the bulk of small businesses, can recognise the importance of KISA to their firm’s performance and begin to engage a broader set of KISA providers. Network services provide an important platform for knowledge exchange within formal and informal networks. They also represent a flexible resource base for the members of the network.
Table 0.1. Types of KISA and their role in innovation
Renewal services: Directly related to innovation, for instance R&D and strategic management consulting
Routine services: Contribute to improvement of maintenance and management of various subsystems within organisations, e.g. accounting
Compliance services: Help organisations to work within the legal framework and various other regulatory regimes, e.g. auditing and some legal services
Network services: Facilitate communication, knowledge exchange and flexible resource allocation,
e.g. informal personal networks and production related networks.

Among the policy recommendations were two I found particularly important:
1) innovation policy frameworks need to respond to the nontechnological aspects of KISA and their impact on innovation capability:

The traditional R&D-based approach to innovation is too narrow and that innovation policies need to recognise the various types of knowledge-intensive services activities that have different roles in the innovation processes. Policy needs to focus more on the interactive people-centred activities, less on the individual firm and more on developing the collective strength of the sector or network. Since typical KISA is mainly based on intangible assets, policies ought to secure sufficient supply of private and public financing for growth oriented KISA. Better understanding of the non-technological elements of innovation and the user contribution to innovation needs to be further developed.

2) a key challenge is improving access to KISA.

This challenge is highlighted by intangibility, complexity and difficulties in assessing the quality and suitability of the services offered prior to engaging with them. Financial assistance is only a partial solution. Awareness of KISA needs to be developed first and knowledge asymmetries between KISA suppliers and users need to be addressed, for instance, by certification of services and through publicly funded demonstration projects.

We often talk about the innovation ecosystem. It is clear that these knowledge-intensive service activities are an important part of that ecosystem – both for their own innovation activities and in how they facilitate innovation in other sectors.
The study also provides us with one more example of how the old boundaries of manufacturing and services are blurring in the I-Cubed Economy. And how we need to continue to change our mindset if we are to come up with appropriate policy responses.