The Industrial Revolution
We have had a number of major industrial revolutions take place during the past few hundred years. We had the first industrial revolution which took place between 1760 and 1840 with the transition from hand production methods to machines, new chemical manufacturing and iron production processes, improved efficiency of water power, the increasing use of steam power, and the development of machine tools.
We then had the mass production revolution which started at the beginning of the 1900s followed by the automation revolution which began after World War 2. More recently we have experienced the tremendous revolutionary changes brought about thanks to the internet and wireless communications.
However, a new industrial revolution is now taking place and it is substantially different in nature to any of the previous ones. It is one not underpinned by some technical or process innovation but rather by a fundamental business model innovation.
The Control Points
Ownership and control of the manufacturing process was key to sustainable business success in the early industrial revolutions. It is not wonder that Communist philosophy which emerged around that time centers around the control of the “means of production” in society. This means of production is the physical and labor capital that is used to produce the different goods in society.
However, in more recent times, manufacturing has become less and less ‘core’ to many companies and has been outsourced. Sustainable business success if no longer dependent on controlling the means of production. Manufacturing is therefore no longer a key business control point.
Traditionally, internal innovation was the paradigm under which most firms operated, with most innovative companies keeping their discoveries highly secret and no attempt made to assimilate information from outside their own research and development laboratories. This was driven by the belief that: “the smart people in our field work for us”. However, in recent years the
world has seen major advances in technology and society which have facilitated the diffusion of information. Companies have also begun to realise that “not all the smart people work for us and that we need to work with smart people inside and outside our company”. Just like manufacturing, R&D is therefore in many ways no longer a key business control point. R&D is no longer core.
Intellectual Property
So if manufacturing and R&D are no longer the key control points for a business, what is? I would argue that IP in its broadest sense is the new fundamental control point for business.
The importance of intangible assets including intellectual property is growing, often equaling or surpassing the value of physical assets for a company. The state of the intangible assets of a company can determine their share and corresponding influence on the market.
The size and quality of a company’s intangible asset portfolio can have a direct impact on several factors, such as the reputation of the company, the level of returns on investments and their access to the market, amongst others.
The way a company is now valued has changed considerably. In the mid 70s, approximately 80% of the value of a company was made up of tangible assets, with the remaining 20% being made up of intangible assets. Today this is completely reversed, with intangible assets making up 80% of the value of the company and only 20% being made up of tangible assets. The exact percentage split will vary from one industry sector and from one company to another. Regardless, the relative value of a company’s intangible assets will be significant.
Pure IP Companies
In this new industrial revolution, ompanies
we are seeing the emergence of pure or almost pure IP companies, with many taking leading market positions in their respective sectors.
These companies have come to realise that they they do not need to control the production process or research and development, but they do indeed need to own and/or command the IP associated with their business.
Apple is the world’s second-largest information technology company by revenue and the world’s third-largest mobile phone maker. It became the first U.S. company to be valued at over $700 billion. Yet in many ways Apple is an IP company. Many of its physical products are manufactured by Foxconn, most of the internal components are built by a variety of electronics companies, while almost all of the applications running on its products are designed and developed by external Application Developers. The value of Apple is determined by its intangible assets and its IP – its brand, its business relations, its formal and informal IP.
ARM Holdings is a British multinational semiconductor and software design company. It is considered to be market dominant in the field of processors for mobile phones (smartphones or otherwise) and tablet computers. Unlike most traditional microprocessor suppliers, ARM only creates and licenses its technology as intellectual property. It has no fab of its own.
Uber develops, markets and operates a mobile-app-based transportation network. The Uber app allows consumers to submit a trip request, which is routed to crowd-sourced taxi drivers. It is one of the world’s largest taxi firms but yet does not own or operate any taxis. Its value is in its brand, its app, the business relationship it has with drivers, its IP.
Facebook’s Communication Manager Iain Mackenzie summed up Facebook well in a recent interview.
“Today people have shared the birth of their first child, wedding, hooked up, broke up, mourned, outed themselves, said something dumb, said something profound, confessed that life’s got too hard for them, been brought back from the brink by a friend, or a stranger, found a job, posted something that lost them their job, learned a fact that will save their life one day, found their new favourite song, and hit ‘like’ on a cat picture – all on Facebook.”
Facebook has become the digital novel of people’s lives. Facebook is the world’s most popular media company yet it creates no content. The content is created by its users. It is the Facebook brand, the raw data and processes data it possesses, its platform and its IP which makes it what it is.
Alibaba is one of the world’s largest retailer but has no inventory, Unlike traditional retailers or even many on-line retailers, Alibaba does not take ownership of inventory, stock it in their distribution centers, and then fulfill the orders. Alibaba has an e-commerce platform and a “community” to connect buyers and sellers.
Airbn is one of the world’s largest accommodation providers yet owns not real estate or property.
These are just a few examples but there are many other pure IP companies emerging in this new industrial revolution, and they exist across many different industry sectors.
to be continued…
Author: Donal O’Connel
Managing Director, Chawton Innovation Services Limited
