Portrait of Henry Ford (ca. 1919) (Photo credit: Wikipedia)
Apple's amazing increase in value is more than just a "rah-rah" story for a turnaround. Fundamentally, Apple is telling everyone – globally – that there has been a tectonic shift in markets. And if leaders don't understand this shift, and incorporate it into their strategy and tactics, their organizations are going to have a very difficult future.
Recently Apple's value peaked at $600B. Yes, that is an astounding number, for it reflects not only 50% greater value than the oil giant Exxon/Mobil (~$390B), but more than the entire value of the stock markets in Spain, Greece and Portugal combined!
Source: Business Insider.com
This astounding valuation causes many investors to be reticent about owning Apple shares, for it seems implausible that any one company – especially a tech company with so few employees – could be worth so much.
Unless we look at this information in the context of a major, global economic shift. Consider that what the world values has changed dramatically. And that what investors are telling business (and government) leaders is that in a globalized, fast paced world value is based upon what you know, when you know it – in other words information. Not land, buildings or the ability to make things.
We've moved from an agrarian through the industrial to the new information economy
Three hundred years ago the world's wealthiest people owned land. For centuries sars were fought to control land. Kings owned land, and by controlling it captured the value of everything produced on that land. As governments developed, reducing the role of kings, land barons became the wealthiest people in the world. In an agrarian economy, where most human resources (and pretty much all others for that matter) were deployed in food and shelter production owning land was the most valuable thing on the planet.
But then some 120 years ago along came the industrial revolution. Suddenly, productivity rose dramatically by applying new machines to jobs formerly performed by humans. With this shift, value changed. The great industrialists were able to capture the value of greater productivity – making people like Cyrus McCormick, Henry Ford and Andrew Carnegie the wealthiest of the wealthy. Worth more than kings, government leaders, most states and many foreign countries.
The age of manufacturing was based upon the productivity of machines and the application of industrial processes to what formerly was hand labor. Creating tools – from engines to automobiles to airplanes – created great wealth. Knowing how to make these machines, and making them, created enormous value. And companies like General Motors, General Dynamics and General Electric were worth much more than the land upon which food was produced.
The Industrial Economy destroyed land values by making the resource less valuable
By the middle 1900s America's farmers were forced to create ever larger farms to remain in business, and were constantly begging for government subsidies to stay alive via price controls (parity programs) and land "set-asides" run by the Agriculture Department. By the 1980s family farms going broke by the thousands, agricultural land values plummeted and the ability to create value by growing or processing food was a struggle.
Across the developed world, wealth shifted into the hands of industrial companies from landowners. To survive in agriculture required machinery more than land, as vast tracts could be farmed with few people, but required enormously expensive equipment. The industrial products determined value, not the land upon which they were used.
The Information Economy destroys industrial value, while creating value elsewhere
Sometime in the 1990s the world shifted again, and that's what the chart above shows us. Countries with little or no technology – no information economy – cannot create value. Left with nothing but tool making, no new value is created. On the other hand, companies that can drive new levels of productivity via the creation, management, use and sale of information can create enormous value – like Apple.
Retail is no longer about "location, location, location" or inventory
Think about the incredible shift that has happened in retail. America's largest and most successful retailer from the 1900 turn of the century well into the 1960s was Sears. In an industry that long equated success with "location, location, location" Sears has had, and continues to control, enormous amounts of land and buildings. But the value of Sears has declined like a stone pitched off a bridge, now worth only $6B (1% the Apple value) despite all that real estate!
Simultaneously, America's largest retailer Wal-Mart has seen its value go nowhere for over a decade, despite its thousands of locations that span every state, huge quantities of inventory and super-efficient supply chain. Even though Wal-Mart keeps adding stores, and enlarging stores, adding more and more land, buildings and inventory to its "asset" base the company's customer base, sales and value are mired, unable to rise.
Yet, Amazon – which has no land, and almost no buildings – has used the last 20 years to go from start up to an $86B valuation – doing much better for shareholders than its traditional, industrial thinking competitors. In the last 5 years, Amazon's value has roughly quadrupled!
Source: Yahoo Finance
Yes, Amazon is a retailer. But the company has learned that applying an industrial strategy is far less valuable than applying an information strategy. As an internet leader, first with most browser formats on PCs and smartphones, Amazon has reached far more new customers than any traditional real-estate or inventory/product line focused company.
By launching Kindle, Amazon focused on the information in books, rather than the format (print) revolutionizing the market and capturing enormous value. By launching Kindle Fire, Amazon takes information one step further, making it possible for customers to access new products faster, order faster and build their own retail world without ever going to a building.
By becoming a tech company, Amazon is clearly well on the way to dominating retail, as Sears falls into irrelevancy and almost surely bankruptcy, and Wal-Mart stalls under the overhead of all that land, buildings, inventory and vast number of minimum-wage, uninsured employees.
Despite Balance Sheet enthusiasm of financial folks, value is not in hard assets
We now must realize that value is not created by what accountants have long called "hard assets" – land, buildings and equipment. In fact, the 2 great U.S. recessions since 2000 have demonstrated to everyone that there is no security in these. Land, building and other "hard asset" values can decline, decline fast, and decline far. Just because these things are easy to see and easy to count does not insure value. They can easily be worth less than they cost to make – or own.
Successful competition in 2012 (and going forward) requires businesses know about customers, products and have the ability to supply solutions fast with great reach. Winning is about what you know, knowing it early, acting upon the information and then being able to disseminate that solution fast to those who have emerging needs.
Facebook stole Instagram, and you should know why
Which is why you have to be excited about the brilliant move Facebook made to acquire Instagram last week. In one fast, quick step Facebook bought the ability to easily and effectively provide mobile image solutions – across any application – to millions of existing users. Something that every single person, and business, on the planet is either doing now, or will be doing very soon.
Source: Wired
On a cost-per-existing-customer basis, Facebook stole Instagram. And that's before Facebook spreads the solution to the rest of its 780million users! Forget about how many employees Instagram has, or its historical revenues or its assets. Or lack of historical revenue. In an innovation economy, if you have a product that 35million people hear about and start using in less than a year, you have something extremely valuable!
Kudos to Mark Zuckerberg as CEO, and his team, for making this acquisition so quickly. Before Instagram had a chance to hire bankers, market itself and probably raise its value 10x. That's why Mr. Zuckerberg was Time Magazine's "Man of the Year" at the start of 2011 – and why he's been able to create so much more value for his shareholders than the CEOs of industrial companies – like say GE.
Going forward, no company can plan to survive with an industrial strategy. That approach, and those rules, simply don't create growth – or high returns. To be successful you MUST become a tech company. You MUST be expert in understanding the information needs of customers, and how to supply information solutions that have high value. And while this may not feel comfortable, it is reality. Every business must shift, or die.
