What are your capabilities worth?
- By: John P Sykes
Posted in: Blog, Exploration, Management, Mineral Economics, Mining, Publications, Strategy
September has been a busy month, however, I now have some time to update you on some of the Strictly Boardroom articles that have been published on MiningNewsPremium.net this month, by Allan Trench and myself.
The first article that came out this month (on the 5th) was entitled “What are your capabilities worth?” and discussed the scalability of corporate capabilities in mining and exploration companies. A key part of strategy often ignored in the asset-focused (i.e. mines & projects) mining industry is specific corporate capabilities that align with specific strategies. At its most basic your capabilities should align with your strategy, i.e. only go on an M&A spree if you’re shrewd in the commercial and financial capabilities category; and similarly, if you’re no good at exploration, don’t bother drilling loads of holes in remote greenfields projects.
It is however not quite this simple. The capabilities must also be scalable. Being the world’s best ‘sheep shearer’ is not scalable, both the market size is limited, and one’s ability to multiple up the scale of the operation – one individual can only shear so many sheep in a year. By contrast the world’s best manufacturer of sheep shearers can at least scale up the capability by using manufacturing processes – they are not limited by the time available to one person. However, they are still limited by the market size. The world’s best manufacturer of smart phones (Apple) however can both scale up and target a big market. This is why Apple is such a big company, and the world biggest sheep shearer manufacturer (whoever that may be) is not.
Apple actually takes this further by taking advantage of ‘increasing returns economics’. Traditionally economic returns decrease with scale until you meet the marginal unit of production, where the cost of producing one more unit is not worth the sale price of that unit – this usually comes as the market is satiated and prices become stable as supply and demand reach equilibrium. However, with ‘increasing returns economics’ the economic returns increase with scale – usually via some kind of network effect. In the case of Apple, the bigger and more profitable the iTunes store becomes, the greater variety of songs, TV programmes, books, films, podcasts etc., it can afford to offer through the store, so the more attractive the proposition becomes, attracting yet more customers, willing to pay even more for ever greater choice. Similarly Facebook, LinkedIn, Twitter et al., take advantage of network effect ‘increasing scale economics’ via the subscriber bases – the more users the more people there are to connect with (and the more ‘free’ user generated content is produced) and thus the more attractive the network is to join – the bigger the network the more companies are willing to pay to advertise on these social media platforms, and as the variety of people on the platform inevitably increases with volume, the wider the variety of advertisers there are wanting to advertise on the platform. This is why the likes of Apple and Facebook are VERY big companies.
A final factor is where the economics rents accrue in the successful capability-led business strength – to the company or to the employees. From a corporate perspective you would want them to accrue to the company, but from an individual perspective you may want to explore capabilities where the returns disproportionately return to you, rather than your employer. Capabilities based on individual skills are not only unscalable (i.e. the sheep shearer above) but often the returns flow back to the employee, rather than the employee. This is partly why management consultants are paid a lot (and make up much of the cost base of a consultancy firm) whereas sprocket manufacturing line workers, even excellent ones, are not. Professional footballers are perhaps the best example of this – with pro-footballers essentially capturing almost all of the economic returns to football clubs – making the clubs themselves bad investments. Returning to Apple and the other tech titans, although they likely have many individual-based capabilities (top class programmers etc.,) they also have many scaleable, non-person restricted capabilities (e.g. supply chain management, brand management) where the rents return to the company, not its (admittedly well-paid) top employees – brand and reputation are particularly important in this regard. The Apple brand is much stronger than that of any of its employees, so it captures the rents, whereas the brand of Ronaldo or Messi is proportionally much greater when compared to their owners (Real Madrid and Barcelona) thus the footballers capture the rents, not the football clubs. Again this is why Apple is a VERY VERY big company.
For more detail the full article is available to subscribers on MiningNewsPremium.net.
For keen followers of the Strictly Boardroom column, our new book “Strictly (Mining) Boardroom Volume II: A Practitioners Guide for Next Generation Directors” is out now and available as a paperbook or e-book from Major Street Publishing or Amazon.