Opportunities for Action in Consumer Markets. Finding New Value in Legacy Assets

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1 Opportunities for Action in Consumer Markets Finding New Value in Legacy Assets

2 Finding New Value in Legacy Assets Great companies make good things happen even in bad times. Now, squeezed by the constraints of a sluggish economy, the greatest consumer companies are once again earning their stripes by creating new value from legacy assets. In some cases, these companies have learned how to exploit old assets in novel ways, occasionally enlisting the Internet in the effort. In other cases, they are finding value in assets that no one ever considered valuable before. In both situations, the result is additional sources of growth and profitability for core businesses. To take advantage of such opportunities, companies need to adopt a far more expansive view of what constitutes an asset and how best to realize value from it. They must also develop the capabilities and processes for systematically redeploying their assets to create new businesses. The Hard Value of Soft Assets According to the traditional view, an asset is anything that appears on the balance sheet for example, fixed assets such as property, plant, and equipment, or current assets such as inventory and cash. In the new economy, this view is unnecessarily limiting. Some of a company s most important assets are so-called soft assets, which don t show up on the balance sheet for example, customer information, intellectual property, and management reputation. Most companies are vaguely aware of the potential worth embedded in such assets. But few go to the trouble of creating a comprehensive inventory of their soft assets with explicit plans for realizing that potential.

3 The exhibit Creating a Complete Inventory of Assets illustrates how such an inventory might be developed starting with the traditional balance-sheet items and then moving to less obvious assets, such as supplier relationships, loyalty programs, and employees attributes. When organizations take a broader view of what constitutes an asset, they are often surprised by just how many opportunities they have. One company that is well aware of its opportunities is Starbucks, an organization that has been particularly innovative in leveraging a wide range of traditional and not-so-traditional assets. Among its most obvious assets is, of course, its well-known brand, which draws customers into its outlets as well as to products such as Frappuccino, the popular coffee drink. If the brand brings customers into a Starbucks store, it can also attract them to other businesses, such as bookstores and airlines. That drawing power has caught the attention of Barnes & Noble and United Air Lines, which have formed partnerships with Starbucks that allow them to sell its coffee. They benefit by offering customers a desirable product, and Starbucks gains additional distribution points. In addition to its brand, Starbucks has at least two other valuable, albeit less obvious, assets. One is its loyal (some might say addicted) customer base of high-earning, highly educated consumers. Another is a retail presence across the United States and other parts of the world that is around 3,000 stores strong and growing. Starbucks looked at how those assets might be leveraged and came up with some innovative ideas to enrich its brand, attract more customers, and generate revenue. One project is a partnership with Microsoft to introduce wireless Internet access over the next two years

4 in nearly three-quarters of Starbucks stores. Since most customers tend to settle in after buying their coffee reading, chatting, or working on their laptops offering wireless service seems a natural next step. Through this partnership, Microsoft hopes to increase usage of its MSN portal and build loyalty with a very attractive, Internet-savvy consumer segment. For its part, Starbucks is looking to sell more coffee, both to established patrons who stop by more frequently to check their and to new customers drawn in by the service. Capturing the Value Once a company has created a comprehensive inventory of the various types of hard and soft assets it can exploit, it must figure out precisely how to realize value from them. In some cases, legacy assets can quickly be monetized as DuPont has discovered. Each year the company spends billions of dollars to research and register around 350 patents, many of which don t yield any returns. So DuPont decided to triage its patent portfolio according to each patent s intrinsic value, its value to the company, and its value to others. Patents that are no longer valuable to anyone, as well as those with a short shelf life, are allowed to expire. There is, however, another group of patents that are no longer worthwhile to the company but are still worth something to others. DuPont has come up with a couple of creative ways to leverage those sleeping assets. One venture is a Web site called yet2.com, which DuPont formed with a consortium of 11 other companies for the purpose of selling patents. But that still leaves the patents for technologies that might be

5 valuable someday but aren t yet ripe for licensing. The solution: give them away. DuPont has made such gifts to three universities, reaping a tax write-off of $64 million. Other companies have discovered how to leverage the value of human assets. Porsche, for example, employs some 2,000 of the world s best auto engineers even though it manufactures only a few models. The company views itself not just as a producer of luxury cars but also as a supplier of engineering genius. It didn t take a great intuitive leap for Porsche to realize that it could outsource its R&D capability to other automakers, such as Volkswagen. That move has brought in as much as $30 million per year in incremental revenue. Beyond generating income, a company s existing assets can often provide the kernel for the creation of platform businesses that the company sets up on its own or with partners. The most important of these ventures target fundamental improvements in the economics of the core business. For instance, Delta Air Lines has established an online portal for smallbusiness travelers called Mind Your Own Business Travel (MYOBTravel.com). The venture uses the Internet to serve a segment of travelers that was pro- Creating a Complete Inventory of Assets Customer assets Soft assets Customer touch points Customer base Proprietary channels Customer information Loyalty programs Brand Soft assets Fixed assets Capabilities Property, plant, equipment Investments Purchasing power Management reputation Balance sheet items Hard assets Supplier relationships Proprietary content Access to customers and employees Current assets Inventory Cash Underdeveloped patents Market information Internal assets Employee attributes Intellectual property Supplier assets Soft assets SOURCE: BCG analysis.

6 hibitively expensive to reach in the past. Other platform businesses allow a company to deepen its bonds with existing customers and create new sources of revenue. For example, Delta is forming partnerships with wireless companies to start a number of businesses that will give travelers uninterrupted wireless access on the ground and in the air. An Out-of-Body Experience Exploiting hidden assets is an out-of-body experience for most companies. An industry-specific mindset can make it hard for managers to recognize alternative uses for their assets. Traditional planning processes don t encourage the kind of fresh thinking necessary to identify new opportunities, and funding processes are slow and inflexible. New capabilities are required for success. The first essential capability is a clear strategic focus. The evolution of new-economy businesses remains highly uncertain. Still, no company can afford to wait until the future becomes clear, for the simple reason that the choices players make now will shape their industries. A company needs to establish a sense of direction that is flexible enough to let the organization adapt to unanticipated changes. Managers and employees must be able to filter the many opportunities that come their way and identify the ones that are truly important. Another capability a company needs is a supercharged business-development group. Such groups are staffed with savvy dealmakers who know how to form nontraditional partnerships and alliances rapidly, and can recognize when a particular opportunity fits or clashes with a company s core strategy. To that end, Delta has established a full-time ventures

7 group that reports to the CFO and identifies and vets potential strategic partners and deals. A third key area of expertise is new-business creation. A company must be able to mobilize teams quickly to road test new business models and launch the most promising ones. At many companies, incubation teams help accelerate the development of new platform businesses. * * * Extracting new value from legacy assets represents the next wave of value creation at large, established consumer companies. But to do it right, senior managers must oversee the wholesale transformation of the way their companies conceive of assets. They will need to help their companies identify new opportunities for creating value from those assets and then act to exploit them whether by creating new businesses or restructuring the old. Michael S. Deimler George Stalk Jr. Jim Whitehurst Michael S. Deimler is a vice president in the Atlanta office of The Boston Consulting Group. George Stalk Jr. is a senior vice president in the firm s Toronto office. Jim Whitehurst is a vice president in BCG s Atlanta office. You may contact the authors by at: deimler.mike@bcg.com stalk.george@bcg.com whitehurst.jim@bcg.com The Boston Consulting Group, Inc All rights reserved.

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