Operations

Veblen Goods
Veblen Goods Jonathan Poland

Veblen goods are a type of consumer good that is perceived as being more valuable or desirable because of its high price. These goods are named after economist Thorstein Veblen, who first described this phenomenon in his 1899 book “The Theory of the Leisure Class.”

Veblen goods are often associated with luxury or prestige products, such as high-end fashion items, expensive cars, and exclusive vacation destinations. The high price of these goods is often seen as a sign of quality, exclusivity, or status, which can make them more attractive to consumers.

There are several factors that contribute to the perceived value of Veblen goods. One is the concept of “conspicuous consumption,” in which people use their purchasing decisions to signal their wealth or social status to others. Another is the idea of “snob appeal,” in which people are drawn to products or experiences that are perceived as rare or exclusive.

Veblen goods can be an effective marketing strategy for businesses targeting high-end or prestige markets. However, it is important for businesses to be mindful of the potential for price sensitivity among consumers and to ensure that the value of the product or service is perceived as being worth the high price.

In summary, Veblen goods are consumer goods that are perceived as being more valuable or desirable due to their high price. These goods are often associated with luxury or prestige products and may be marketed to high-end or prestige markets. However, it is important for businesses to carefully consider the value of the product or service and the potential for price sensitivity among consumers when pricing Veblen goods.

Inferior Good
Inferior Good Jonathan Poland

An inferior good is a type of consumer good for which the demand decreases as the consumer’s income increases. In other words, as the consumer’s income rises, they are less likely to purchase inferior goods and are more likely to substitute them with higher-quality or more expensive goods.

There are several factors that can contribute to a good being classified as inferior. One factor is the availability of substitutes. If there are good substitutes available, then the demand for the inferior good is likely to decrease as the consumer’s income increases, since they can choose to purchase the substitute instead. Another factor is the consumer’s taste and preferences. If a consumer has a preference for higher-quality or more expensive goods, they may be less likely to purchase inferior goods as their income increases. These goods may be less expensive than higher-quality brands, but they may also be perceived as being of lower quality or less desirable. As a result, consumers may choose to purchase higher-quality brands as their income increases, leading to a decrease in the demand for inferior goods.

Here are some examples of inferior goods:

  1. Generic or lower-quality brands of food: As a consumer’s income increases, they may be more likely to purchase higher-quality brands of food or to eat out at restaurants, leading to a decrease in the demand for generic or lower-quality brands of food.
  2. Lower-quality clothing: As a consumer’s income increases, they may be more likely to purchase higher-quality or more expensive clothing brands, leading to a decrease in the demand for lower-quality clothing.
  3. Used cars: As a consumer’s income increases, they may be more likely to purchase new cars or higher-quality used cars, leading to a decrease in the demand for lower-quality used cars.
  4. Public transportation: As a consumer’s income increases, they may be more likely to purchase a car or to use a ride-sharing service, leading to a decrease in the demand for public transportation.
  5. Cheap or low-quality household items: As a consumer’s income increases, they may be more likely to purchase higher-quality or more expensive household items, leading to a decrease in the demand for cheap or low-quality items.

It’s important to note that these are just examples, and not all consumers will behave in the same way. Some people may continue to purchase inferior goods even as their income increases, while others may switch to higher-quality or more expensive brands regardless of their income level.

Structural Capital
Structural Capital Jonathan Poland

Structural capital is one of the three primary components of intellectual capital, and consists of the supportive infrastructure, processes, and databases of the organization that enable human capital to function. Structural capital refers to the intangible assets and resources of an organization that support its operations and enable it to achieve its goals. It includes the systems, processes, policies, and culture that are in place within the organization, as well as the knowledge and expertise of its employees. Unlike human capital, which is the knowledge and skills of individual employees, structural capital is embedded within the organization and can be accessed and utilized by multiple individuals.

Structural capital is a key source of competitive advantage for an organization, as it helps to retain and utilize the knowledge and expertise of employees, enabling the organization to operate more efficiently and effectively. It also plays a role in the organization’s ability to innovate and adapt to change. While structural capital is often overlooked or undervalued compared to tangible assets, such as physical capital and financial capital, it is a crucial component of an organization’s intellectual capital. The following are illustrative examples of structural capital.

Data
Data such as a list of customers.

Documentation
Information created by employees to document processes, procedures, policy, know-how, research, decisions, failures and any other useful knowledge.

Media
Media such as a training video.

Principles
Principles, norms and rules that are adopted as part of a firm’s organizational culture.

Processes
Business processes such as a semi-automated process for fulfilling orders.

Procedures
Documented human steps for achieving a result.

Methods
Exact steps executed by a machine or system. For example, an algorithm for calculating risk.

Tools
Technologies that help employees complete work such as an application.

Automation
Technologies that complete work automatically such as a system or robot.

Intellectual Property
Intellectual property such as brands, trademarks, patents, copyrights and trade secrets.

Knowledge Capital
Knowledge Capital Jonathan Poland

Knowledge capital refers to the resources and capabilities that enable a nation, city, organization, or individual to engage in knowledge work, which refers to the production, distribution, and use of knowledge. These resources and capabilities may include education, health, safety, well-being, and culture, which all contribute to the development of knowledge, talent, and ability. In other words, knowledge capital represents the potential of a society or entity to create, share, and apply knowledge in order to solve problems and create value. The following are common types of knowledge capital.

Leadership
The ability to get people moving in the same direction towards common objectives.

Influencing
The ability to sell and influence decisions and actions.

Know-how
Practical knowledge that allows you to complete tasks.

Creativity
The ability to create new value such as designs and art.

Strategy
Identifying goals and objectives and effective plans to achieve them.

Problem Solving
The ability to solve problems.

Decision Making
The ability to make decisions that are likely to work out well.

Intellectual Capital
Intellectual Capital Jonathan Poland

Intellectual capital is the intangible value of an organization that is derived from the knowledge, skills, and expertise of its employees, as well as its intangible assets. It includes both human capital, which refers to the knowledge and skills of individual employees, and structural capital, which refers to the processes, systems, and intellectual property that support and enhance the organization’s operations.

Intellectual capital is a key source of value for organizations, as it can drive innovation, increase efficiency, and improve decision-making. It is also a key factor in the success and competitiveness of an organization, as it enables the organization to differentiate itself from its competitors and to adapt to changing market conditions.

There are several ways in which organizations can manage and leverage their intellectual capital to drive value. These include:

  • Developing and investing in employee training and development programs to enhance the knowledge and skills of the workforce
  • Encouraging collaboration and knowledge sharing among employees to foster innovation and drive efficiency
  • Identifying, managing, and protecting intangible assets such as patents, trademarks, and copyrights
  • Implementing systems and processes that support and enhance the organization’s operations

Overall, managing intellectual capital effectively is an important aspect of business strategy and can help organizations to achieve long-term success and competitiveness. The following are the primary types of intellectual capital.

Human Capital
The knowledge, know-how, abilities and creativity of employees. In many cases, people don’t like to be referred to as “capital.” Terms such as talent or human resources are common alternatives.

Structural Capital
Intangible elements of a firm’s organizational culture, business processes and ability to innovate. This includes documents, media, processes, systems, applications, data, intellectual property and trade secrets.

Relational Capital
A firm’s relationship with the outside world including investors, customers, employees, partners, regulators, communities and other stakeholders. This can include both informal relationships such as business contacts and formal contracts.

Fixed Assets
Fixed Assets Jonathan Poland

Fixed assets are long-term physical resources that are used in a business to produce goods or services. They are also known as tangible assets or property, plant, and equipment (PP&E). Fixed assets are typically expected to have a useful life of more than one year and are not intended for resale. Fixed assets are long-lived assets that cannot be easily converted into cash.

Examples of fixed assets include land, buildings, machinery, and vehicles. They are generally acquired for the purpose of producing goods or providing services to customers, and are not typically consumed or sold in the normal course of business.

Fixed assets are important for businesses because they can be used to generate revenue and profits over a long period of time. They are also a key source of collateral for borrowing and financing, and can be used as security for loans and other types of debt.

However, fixed assets also come with costs, including acquisition costs, maintenance costs, and depreciation expenses. It is important for businesses to carefully manage their fixed assets and to ensure that they are being used effectively and efficiently. This may involve tracking the condition and performance of fixed assets, conducting regular maintenance and repairs, and disposing of assets that are no longer useful.

Examples of Capital Intensive
Examples of Capital Intensive Jonathan Poland

An industry, organization, or activity that is capital intensive requires a large amount of fixed capital, such as buildings and machinery, in comparison to labor and other factors of production. This means that a significant portion of the resources used in these industries is invested in capital assets rather than in labor. Capital intensive industries tend to be more automated and rely on technology and machinery to produce goods or services, rather than relying on a large workforce. Examples of capital intensive industries include manufacturing, construction, and energy production.

Capital Intensive Industry

Capital intensive industries are industries that require significant fixed capital such as property, plant and equipment relative to their revenue level to be competitive. For example, airlines are capital intensive because aircraft are expensive.

Labor

It is common to measure capital intensity in terms of fixed capital per employee. For example, a consulting business that has $200,000 in fixed capital per employee versus a real estate investment firm that has $140,000,000 in fixed capital per employee with the latter being more capital intensive.

Productivity

Generally speaking, capital intensive businesses tend to have higher labor productivity. This is certainly true on a historical basis but is occasionally changed by new business models that are knowledge intensive. For example, a farm with $2 million in equipment and three workers would tend to have higher productivity than a farm with $200,000 in equipment and three hundred workers.

Capital Efficiency

Capital efficiency is the amount of net profit that is generated by a dollar of capital. Everything else being equal, businesses with less fixed capital are generally more attractive. For example, two restaurants have net income of $300,000 per year but one represents a fixed investment of $2 million whereas the other represents an fixed investment of $1 million. The $1 million dollar restaurant is less capital intensive and is probably a better investment unless revenues are about to collapse because the business isn’t sustainable for some reason.

Debt

Generally speaking, capital intensive businesses tend to take on significant debt. This makes a business less attractive because debt payments do not go away when business is slow. Debt can also leave a business exposed to interest rate risk, refinancing risk and exchange rate risk. A firm with a large debt may be profitable in an environment of high economic growth and low interest rates but then suddenly turn unprofitable in a recession or when interest rates go up. If debt is in a foreign currency, the business may be highly sensitive to changes in exchange rates.

Capital Spending

Capital needs to be continually maintained, repaired and replaced. This is another problem with capital intensive industries that can complicate investing. For example, an airline may look profitable until it suddenly announces that it needs to replace half of its fleet in the next three years.

Competitive Advantage

All else being equal, a business with less capital is more efficient than a business with more capital if they are achieving the same results in the same industry. However, there are nuances to this that are significant. It is common for companies to outsource virtually everything to reduce their capital. At some point this introduces competitive disadvantages that may render a business completely worthless. For example, a fashion brand that outsources marketing, manufacturing, logistics and customer service will have a difficult time controlling its customer experience such that it may simply fail on the market.

Knowledge Intensive Industry

A knowledge intensive industry is an industry that primarily relies on human capital, also known as talent. Such industries may have few fixed assets. For example, a law office that has relatively high revenue as compared to its meager physical assets such as furniture, fixtures and computers.

Labor Intensive Industry

A labor intensive industry is an industry with low productivity such that it requires a great deal of labor relative to revenue. This can be due to a lack of automation such as an agricultural crop that must be harvested by hand. It is also common for some service industries to be labor intensive because customers value service from employees that is time consuming. For example, full service restaurants are labor intensive.

Distribution
Distribution Jonathan Poland

Distribution is the process of making a product or service available for use or consumption by consumers or businesses. It involves a range of activities, such as transportation, warehousing, and inventory management, that ensure that the product or service is available in the right quantity, at the right time, and in the right place. Distribution is an important part of the supply chain, as it connects the producers of goods and services with the consumers who need them. It can also play a role in pricing, as the cost of distribution is often included in the price of the product or service.

Products and services are distributed by channels such as direct selling, digital commerce, retail locations and partners. A distribution strategy may include several channels with a separate pricing strategy for each. It is also common for a distribution strategy to include methods of managing channel partners such as offering incentives to meet sales goals. Distribution typically has a geographical element and it’s common to use different channels from one region to the next. For example, partners may be used to access international markets. The following are examples of distribution.

Retail
An organic food brand opens its own chain of retail shops.

Retail Partners
A toy manufacturers sells through a network of retail partners.

International Retail Partners
A French furniture company operates its own retail locations in France and sells through retail partners in 18 other countries.

Wholesale
A sugar refiner sells to a sugar wholesaler.

Personal Selling
An information security consulting company sells its services directly to clients by networking at security and IT events.

Direct Marketing
An electronics company sells devices with television ads and a phone number.

Digital / Internet
A cloud services provider sells its services exclusively through its website using internet advertising.

Direct Mail
A fashion brand develops a list of customers and sends them a full product catalog each season that drives telephone, internet and retail purchases.

Dealer Network
A automotive company sells through a network of authorized independently owned dealerships.

Value Added Reseller
A solar panel manufacturer partners with construction companies who sell the panels as an option on new buildings.

Sales Agents
A property developer sells through partnerships with a variety of sales agents.

Switching Barriers
Switching Barriers Jonathan Poland

Switching barriers are factors that make it difficult or inconvenient for customers to switch from one product or service to another. These barriers can take many forms, including costs, contractual obligations, risks, and disruptions to service. From a seller’s perspective, switching barriers can help prevent customers from leaving and allow the company to charge higher prices. Some companies may even intentionally create barriers to switching, such as by imposing fees or making it difficult to close an account, in order to make it harder for customers to leave.

From a customer’s perspective, switching barriers can be a source of frustration and expose them to higher prices, unfair terms, reductions in benefits, or degradation of service. In some cases, industries with high switching barriers may be subject to government regulation in order to protect consumers from unfair practices.

Overall, switching barriers can have significant implications for both buyers and sellers in a market. Customers may face barriers to switching that make it difficult for them to find the best product or service for their needs, while sellers may use these barriers to maintain their market position and charge higher prices. In many cases, it is important for customers to be aware of switching barriers and be prepared to take steps to overcome them in order to find the best product or service for their needs. The following are some common types of switching barriers.

Learning
The time and expense of learning about a new product or service. If you purchase a new type of mobile device, you need to learn its interfaces.

Integration
The requirement to get a new product or service working with everything else you own. For example, importing your data into software.

Configuration
The need to configure and customize the new product or service.

Development
The need to create things for the new product or service. For example, the need to develop software to use a new database product.

Productivity & Efficiency
A decrease in productivity and efficiency due to the process of learning and integrating a new product or service. For example, a salesperson works more slowly after switching to a new type of sales automation software.

Business Disruption
The potential for your customer services, marketing or operations to go offline as you make changes or switch over.

Risks
Risks associated with a new product or service. If you try a new shampoo, you may risk a bad hair day.

Cancellation Fees
Penalties charged by your current provider such as a cancellation fee. It is common for firms such as telecom companies to attempt to increase switching costs to retain customers, even if they are dissatisfied. Firms with high switching costs may have little incentive to improve customer satisfaction.

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