The change of asset value in the digital era – will your heavy assets become a deadly burden?

An organization’s digital assets are quickly rising in importance, becoming vital sources of business value in many industries. Traditional, asset based companies have started to get concerned about their heavy asset base. Large machines and facilities used to be a company’s pride and joy – now they seem suddenly be pushed off the center stage. Two key questions have risen; what will happen to companies owning vast tangible assets in the future and will their tangible asset be as value generating in the digital era or turn into a heavy burden that nobody wishes to own?

During the industrial era, physical assets were an important source of competitive advantage. This old paradigm has started to face serious challenges in the digital era as the economic realities are swiftly changing. Many physical products are consumed as services or are significantly enhanced by new digital capabilities. Over the top and industry platforms have created new business models. At the same time good old value chains are transforming into complex, fast and cost-efficient value networks, enabling more tailored products and services, at scale.

These changes will impact many asset heavy companies. Especially, when they try to compete with asset light and ecosystem driven companies. It is too early to predict the ultimate winners various industries, but it is obvious that heavy, asset driven companies need to seriously rethink how they will compete in the future and what role they will aim to play in the industry or be part of horizontal platforms.

Not too long ago, leading asset based companies such as GE, GM, BP, Walmart, and Exxon Mobile, were considered the most valuable companies in the market. It was all about physical assets, sales, manufacturing and distribution of material goods. A decade ago, the five most valuable companies on the Standard & Poor’s 500 Index were Exxon, GE, Microsoft, Gazprom and Citigroup.

Today, this ranking has fundamentally changed. The S&P’s top five most valuable companies are Apple, Alphabet (parent company of Google), Exxon, Microsoft and Facebook. One might view this as a dramatic shift, but even more incredible is that three of them rose relatively quickly to reach top market valuations and they don’t own similar levels of assets as the leading companies of the past.

Looking into the future, this change will inevitably continue – companies such as Facebook, LinkedIn, Uber and Airbnb have sprung up to take advantage of new opportunities – building horizontal platforms that leverage the assets of you and me; what we have (cars and homes), do (live) and know (friends). At the very moment, similar battles are ongoing in many industries: encounters of horizontal and vertical platforms that leverage the assets of other organizations; what they have, do and know to shape more compelling value propositions at lower cost.

So, what will happen to asset heavy companies in the platform economy (provided the company does not control the platform or own the client or customer relationships)? Assets are naturally still needed to produce the physical goods as part of a platform and the total value proposition, right? Correct.

But to earn the right positioning in the platform economy, it will be an intense battle around five main factors; brand, quality, cost-effectiveness, efficiency and strategic change agility. The first four are obvious and do not differ much from what were relevant in the past. The strategic change agility i.e. how fast can you change and realign your tangible assets to new demands of the platform and its users, may well become the most critical for an asset based company’s existence.

As part of a platform producing an aggregated end to end product or service with supplemental, customized services, a company will need to be function with a high degree of flexibility and change agility. These amplified changes are driven by an ever-increasing knowledge and insights of the customer needs, driving the platform’s value creation. From a platform perspective, the company mastering the above four factors with most optimized way, will win. For an asset heavy company, the first three are easier than the last one. Strategic change agility, therefore will play significant role and require increased focus to build this capability.

Digitalization offers a great opportunity to increase flexibility and agility; enabling digital transactions across the platform and digitizing physical functions leading to a digitized production utilizing physical assets. While for many tangible asset based companies this is a far-fetched goal, at least the strategy and goal should be obvious to any CEO.

There may be many who doubt this scenario and still bet their companies future on the value of tangible assets and the rules of the old days. My two humble recommendations for sceptics out there; take a good look at the recently emerged, new horizontal platforms – connected home, car, mines, healthcare etc. and imagine the future. If that does not convince you, perhaps a simple fact will: Facebook’s 1.8 billion monthly active users are more valuable as an asset than GM’s or GE’s physical assets.

Traditional asset based companies have their place and potentially even lucrative future ahead provided they are fully geared up to be successful players in the platform economy.

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