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The burst of the dotcom bubble has proved that the essence of intangible assets lies in the strength of the real sector.
The growth of the Internet and the hype about the new economy has prompted many management gurus to lay a strong emphasis on building strong intangible assets. The essence of their argument is that companies should build competencies in areas such as design, supply chain management and brand building and leave the `dirty' job of constructing and running factories to contractors. Indeed, the stellar performance of companies like Cisco and Enron in the 1990s, provided strong support for this argument. With the fall of Enron, which burnt its fingers while attempting to convert itself from a brick and mortar to a new economy outfit, this argument looks very weak. On the other hand, the good old `smoke stack' companies, with their physical assets, look safer to investors, even if they do not offer superlative returns.
In their enthusiasm to propound the virtues of intangible assets, what consultants and academics seem to have forgotten is that life cannot go on without physical goods. The brush and paste with which we start the day, the morning coffee we have, the breakfast, lunch and dinner we eat all involve `tangible' items. We ride to the office in `physical' vehicles. A modern office consists of `physical' assets such as chairs, tables, workstations, air-conditioners and coffee vending machines. True, we do consume services such as Internet access, banking, courier and haircuts. But if we carefully reflect, we would realize that we consume much more of goods than services. This argument is applicable to both developing and developed countries. In developed countries, services account for a major portion of the GDP. But this does not imply that people in these countries do not need physical goods. It only means, physical production has shifted to low wage locations. The point to note is that someone has to manufacture goods. The entire world cannot operate on a `virtual' paradigm!
When Enron decided to move out of electricity generation into electricity trading, it thought it was being smart. Indeed, before its recent collapse, it was quite arrogant towards the bigger companies in the energy industry, which owned a lot of physical assets. Former Enron CEO, Jeff Skilling once commented (Fortune, December 24, 2001) on old economy companies, "These big companies will topple over from their own weight." Today, Enron has toppled but many of these old economy companies still exist! Moreover, companies like Cisco, which have been considered the ultimate experts in strategic outsourcing and supply chain management were left clueless when the US technology sector recently went into a slowdown. This forced them to take massive write-offs.
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