BusinessWeek 50

Business Weeks has released its ranking of the 50 best performing companies. According to the cover story, the companies that doing the best are those who are taking advantage of the economic turmoil, “This year’s BusinessWeek 50 is chock-full of companies that changed the rules of engagement in their industries.”

Autodesk exemplifies many of the companies in this year’s BusinessWeek 50, our 13th annual ranking of the best-performing companies in the Standard & Poor’s 500-stock index. While each list invariably includes companies that rode the wave of powerful industry cycles–such as this year’s four energy companies–many more, like Autodesk, earned their spot in the BW 50 as innovators. They created products or services dramatically better and cheaper than anything offered by rivals. “These companies are what I call the ‘disrupters’ of the economy,” says Harvard Business School professor Clayton H. Christensen, an innovation expert. Autodesk and its cutting-edge design software, for example, have helped the makers of everything from appliances to cars to prosthetic limbs take on entrenched rivals with greater resources.

What I especially like about this list is that the companies are innovative across a range of activities: technological, organizational, marketing, etc.:

At Nucor (NUE) (No. 20), experimental technologies and cutting-edge compensation revolutionized steel manufacturing–and may help explain why the company is holding up despite tough times. IntercontinentalExchange (ICE) (No. 17) and its electronic futures market brought greater price transparency to energy trading, and the company is now blazing a new trail by launching one of the first clearinghouses for complex credit default swaps. Occidental Petroleum (OXY) (No. 43) has relied on advanced technology to wring more production out of its oil fields in Texas and is now doing the same in Libya. Laparoscopic tools from Intuitive Surgical (ISRG) (No. 41) have shortened the recovery period for many surgery patients and could in time dramatically reduce the number of beds the nation’s surgical hospitals need.
. . .
In the case of Coca-Cola, that meant finally embracing the change in consumer tastes–and marketing niche brands, such as vitaminwater and its Dasani water, with the same commitment as it does its flagship cola.
. . .
Consider Fastenal, a distributor of nuts, bolts, and 49,000 other tools and parts used by industrial customers. Given the commodity nature of its products, Fastenal works hard to guarantee its costs are the industry’s lowest. To encourage employees to act like owners and shave every penny possible out of its cost structure, Fastenal pours 10% of all profits above a preset level each year into bonuses and 401(k) contributions.

As the Business Week 50 list demonstrates, innovation pays off in economic performance. So, where is the public policy to support this range of innovative activity?

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Valuing houses — not

One would think that by now we would have a handle on measuring economic activity in the tangible economy. But, it appears that a simple thing like a house can cause an uproar. Take the case of an article in today’s Wall Street Journal about a fight between two well known housing experts — Robert Shiller and Thomas Lawler — over whose data is correct. As the story points out:

No one has found a precise way to measure changes in house prices. Because no two homes are exactly alike, changes in the price of one won’t necessarily be matched even by apparently similar homes nearby, much less those hundreds of miles away. Though some indexes track price changes in the same set of houses over time, those can be distorted by major improvements in some of the houses and deterioration in others. The publicly recorded transaction prices, used to create indexes, often are distorted by incentives given to buyers that aren’t tallied in the price.

Yet, as I pointed out yesterday, the housing market seems to work (even in these bad times).
A lesson to be learned about valuation of intangibles. Valuation is a complex issue, even for things that we think we understand.

Intangible valuation myths

The latest issue of Intellectual Asset Management (IAM) magazine has an article on the Ten common myths about intangibles value and valuation (subscription required). IAM editor Joff Wild has posted a summary on his blog Ten intangible/IP valuation myths revealed. I will let you read the 10 myths for yourself. I agree with most – but want to focus on Myth #4:

Each intangible should have only one official value. A single intangible may have several very different values at the same time; all of them valid, depending on who owns it and for what purpose it will be exploited.

This characteristic of an intangible (and these folks use the word to really mean IP) makes the valuation highly context specific. I like to use the analogy to the housing market. There are those who want to use a house as shelter; those who want to rent it out; those who want to use it a speculative investment. In that case of a patent, there are those who want to use the patent to create a product and those who want to own the patent to collect royalties. There are also those who want to sell the patent at a later date — as part of a pool of patents that would be more valuable than a single patent, or after doing further development work on the technology to increase its value, or use the patent for infringement litigation. On top of these categories, we also have defensive ownership. In the housing market, this is buying the lot next to you so no one builds there to block your view.
Yet, for all these different reasons for buying a house, housing prices are generally accepted as valid — even in periods of extreme volatility such as today.
So let me add Myth #11: Intangibles can’t be valued in the market place.
The solution to the valuation problem, it seems to me, is in building up a robust market. And, ironically, building up a robust market requires more attention to disclosure – rather than valuation methodology. If you get the items out to the market – if you let people know they are available for transactions – the market will set a price. It won’t be perfect – in fact it is guaranteed to be subject to all sort of irrational and arational behaviors. But if it is transparent and the process is seen as fair, then the price will be legitimate.
And that is the best valuation methodology of all.

Centralization of government services?

I like Tom Brokaw, but in his op-ed piece in Sunday’s New York Times (Small-Town Big Spending), he got it backwards. The piece is about what he sees as the redundancies of government services and structures:

Yet Iowa proudly maintains its grid of 99 counties, each with its own distinctive courthouse, many on the National Register of Historic Places — and some as little as 40 miles away from one another. Each one houses a full complement of clerks, auditors, sheriff’s deputies, jailers and commissioners. Is there any reason beyond local pride to maintain such duplication given the economic and population pressures of our time?
This is not a problem unique to the states I have cited. Every state and every region in the country is stuck with some form of anachronistic and expensive local government structure that dates to horse-drawn wagons, family farms and small-town convenience.
If this is a reset, it’s time to reorganize our state and local government structures for today’s realities rather than cling to the sensibilities of the 20th century.

But the centralization of government structures — based on economies of scale — which he advocates is exactly the hallmark of the Industrial Age of the 20th Century. The 21st Century – and the I-Cubed Economy — will be one of decentralization and localized services, connected in a vast network. Some government services will likely benefit form consolidation on the network. I am betting, however, that there will still be a need for local governmental structures geared toward the crafting of localized solution (sometimes tweaks of generalized best practices) to localized problems.

Bernanke on Financial Innovation

Last week, Fed Reserve Chair Bernanke gave a speech on Financial Innovation. In that speech he made a very insightful comment:

Regulation should not prevent innovation, rather it should ensure that innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes.

That is good advice for innovation and regulations in general.
And it harkens back to our earlier comments on vetting innovations.
PS — for an interesting discussion of the speech and innovation in financial services, see James Kwak’s blog The Baseline Scenario – Financial Innovation for Beginners.

Reforming our unemployment assistance

I have long complained about our confusing, inadequate and antiquated system for training and assisting workers. First of all, we wait until someone loses their jobs before we decide that it might be a good idea to upgrade their skills. For a nation that confesses to believe that “our human capital is our most important asset”, such an after the fact as our “re-training” programs have now response is just utterly stupid. It is based on the false notion that somehow the government should not ever intervene in the market — that helping foster on the job training is a give away to private companies – who should be doing it themselves. Of course, this argument ignores the market failure that the free-rider problem (i.e. why should I spend money on worker training when I can simply hire away you workers after you pay to upgrade their skills). It also ignores the loss in overall economic competitiveness due to a less than world-class trained workforce (the social welfare argument). Image if we eliminated our tornado warning system — claiming the government shouldn’t interfere with Mother Nature and the only job of the government is to clean up the mess afterwards. But that is exactly the mentality we use when dealing with economic tornados.
We need to move to a proactive system – part of which is a knowledge tax credit to encourage more on-the-job training. (See our working paper on Crafting an Obama Innovation Policy)
Second, when we do have a program to help unemployed workers, it is a mishmash of programs. Today’s Wall Street Journal is running a story about how Crazy-Quilt Jobless Programs Help Some More Than Others. The story notes the huge discrepancies between the Trade Adjustment Assistance (TAA) program and standard unemployment programs.
The story also illustrates why it is so hard to get workers the support they need:

“A worker who loses a job due to trade is not deserving of a more generous safety net than a worker who loses his job due to other forces, such as technological change,” says N. Gregory Mankiw, a professor of economics at Harvard University and former chairman of President George W. Bush’s Council of Economic Advisers.

Mankiw’s comment echo the standard critique: why should we help workers at all. We should be posing the question the other way around:

A worker who loses a job due to economic forces does not deserve a less generous safety net than a worker who loses his job due to trade.

Once we confront the problem in this correct way, then we can start to solve it.
I know, the issue of cost will come up. It is the standard head fake that critiques use to deflect the issue. But we hear this all the time from the “pennywise and pound foolish” crowd. Time and time again, preventive measures have shown to be less costly than after-the-fact remedies.
Continuous worker training is one of those preventative measure that we should institute. In the mean time, we need to create at least an effective response unemployment program by consolidating and upgrading the programs. We can not afford to let our human capital wither in this crisis if we are to restore economic prosperity. Otherwise, our recover efforts will simply be an effort to re-flate the bubble.

Supply chain as a key intagible asset

The possible bankruptcy proceeding for GM are highlighting a key intangible asset in the process: the supply chain. As the Financial Times reports (GM seeks provision for its suppliers):

General Motors is prepared to argue that hundreds of its suppliers are “critical vendors” who require timely payments if it seeks bankruptcy protection, setting the stage for what would be the most sweeping attempt ever to win special treatment for such contractors, people close to the matter say.
Companies often request special treatment for a limited number of suppliers as part of bankruptcy petitions.
Bankruptcy experts say GM would stand a good chance of winning protection for more suppliers than is usual because of the large number that provide “just-in-time” car parts to the company.

As last September’s Intangible Asset Finance Society meeting noted (see earlier posting), it is not just the existence of the supply chain that is the asset. What matters is the management of that supply chain and how it can affect your own reputation assets. I hope the bankruptcy court can take the reputation aspects into account as well.