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Intervention by Denise Caruso Read Intervention by Denise Caruso, Executive Director of the Hybrid Vigor Silver Award Winner, 2007 Independent Publisher Book Awards; Best Business Books 2007, Strategy+Business Magazine

GE’S INTANGIBLES

by Mary Adams ~ May 17, 2008.
Permalink | Filed under: Hybrid Vigor.

When I read the report in the Wall St.Journal that GE is going to sell its appliance business, I immediately thought of the great piece in last month’s Strategy + Business entitled Manufacturing’s “Make or Break” Moment.

GE has been in the appliance business since 1907 and was responsible for many firsts: the refrigerator, room air-conditioner and the toaster oven. This sale is happening now as part of the larger story of GE’s earnings troubles and sagging stock price. The idea is to appease investors’ concerns about short-term earnings by generating cash from the sale of this business.

The decision fits the pattern that Kaj Grichnik and Conrad Winkler discussed in S+B (and in their new book Make or Break), that companies see manufacturing as a cash cow and non-core to their business. They ask the question in this article “How important is industrial capacity to a nation’s well-being?” and offer an alternative:

Old, fossilized plant footprints can become nimble networks; confrontational labor relationships can evolve into constellations of joint interest; outmoded supply chains can be transformed into clearly defined, mutually beneficial partnerships; and stolid aging factories can be retrofitted into showcases of lean manufacturing. Only those companies that appreciate manufacturing, invest in technology, and innovate in this field are likely to prosper.

Networks, labor, partnerships, lean manufacturing. These are all intangibles. Yes, the future of manufacturing lies in a company’s ability to manage its intangibles.

I was especially struck by this case because I often use GE as an example when I talk about intangible value in companies. Despite its significant reliance on manufacturing and infrastructure, GE has traditionally been known for its management capability, for Six Sigma, for being smarter that most—all intangible aspects of business. People instantly get it when I explain that the future of an industrial company like GE is dependent on how well it manages its intangibles.

But clearly, the market is not giving GE credit for their smarts now. According to Yahoo Finance, GE’s Price to Book ratio today is 2.78. Put another way, 36% of its stock price can be found on its balance sheet. This is actually high for industrials. According to a white paper from Ocean Tomo, on the IC Knowledge Center, on average, industrial companies only have 10% of their price on their balance sheets. That means that their intangibles are at 90% where GE’s are currently at 64%.

In my very first posting on this blog, I talked about how “the American farmers are just the latest in the long line of businesspeople on the losing end of the intangibles game.” I can’t help but think that the same applies to GE.

What to do? One part of the solution for companies like GE is to help management and investors “see” the intangibles of the company. That’s why more and more companies are assessing their intangible, intellectual capital to understand the strength of their “knowledge” assets: people, processes, intellectual property, brands and networks. Many people associate these kinds of assets with high tech or service businesses. However, one of the most frequent consumers of the IC Rating™ system is an international tire manufacturer—if they want to understand what’s really going on in one of their businesses, they know they need to look beyond the machines on the floor and look at the intangibles.

But, of course, the second part of the solution is how you leverage these knowledge assets. Intangibles management is ultimately about innovation. The article in the Journal has a long list of the innovations that have occurred over the last one hundred years in the GE appliance business. When I look at this business today, I think: What if you could make a radical change in the energy consumption of appliances? What if you could make appliances fully recyclable? What if you could produce appliances closer to the consumer and save in energy costs? What if…

GE and companies like it truly do have some “make or break” decisions on their plate. Is the next wave of innovation in manufacturing going to happen somewhere else or are they going to learn to manage and leverage their intangibles to regain their leadership in innovation?

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